The recent events in Haiti have once again demonstrated the American people’s ability to reach out and help. We have seen this occur with several natural disasters in recent years such as the Indian Ocean tsunami and Hurricane Karina.
Whether it is medical relief, rescue and recovery assistance, financial contributions to assist in rebuilding, or adoption of orphans, Americans — including those in West Michigan — have come through. In addition to direct private support, the federal government has committed resources, funds and assistance, and Congress has just approved special tax provisions for U.S. taxpayers that make contributions for Haiti relief.
The tax provision is contained in H.R. 4462, which the President signed Jan. 22. It provides for the acceleration of income tax benefits for charitable cash contributions for Haiti’s earthquake victims. Under current law, taxpayers may claim income tax deductions for charitable contributions provided they meet certain requirements. Charitable contributions are generally available for the taxable year in which the contribution is made. For calendar year taxpayers, contributions in a month like January or February are not realized (deducted) until the following calendar year when an income tax return is filed.
The U.S. House of Representatives passed the legislation Jan. 20 and the U.S. Senate passed it Jan. 21. Considering the amount of time some legislation takes to move through the legislative process, this legislation, which was only a couple of paragraphs on two pages, went through at a record pace.
The tax provision permits taxpayers’ charitable contributions for Haiti relief made after Jan. 11 and before March 1, 2010, to count as contributions made Dec. 31, 2009 (if the contribution is for the purpose of providing relief to victims in areas affected by the earthquake that occurred Jan. 12, 2010). The benefit of this provision is it allows calendar year taxpayers who make Haitian earthquake relief-related contributions of cash during the period mentioned the opportunity to take the deduction within their 2009 tax return.
As mentioned earlier, a taxpayer taking advantage of this provision must meet the general requirements applicable under current tax law. This includes maintaining a record of the contribution in the form of a bank record (cancelled check) or a written communication from the donee showing the name of the donee organization and the date and amount of the contribution. In addition, certain substantiation requirements apply in cases of contributions with a value of $250 or more. No charitable deduction is allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement by the donee organization.
The bank record or donee receipt requirements for contributions of less than $250 were part of legislation enacted in 2006 as a result of some perceived abuse by taxpayers claiming charitable deductions for “miscellaneous” charitable deductions and not having documentation for the amount. No longer can someone claim $10 put in a church collection basket without having a receipt or other record of the contribution. The requirement for a check or acknowledgement of smaller contributions applies to years ending after Aug. 17, 2006.
The 2010 legislation attempts to accommodate the recordkeeping rules and considers the changing nature of how contributions may actually be made, such as making contributions by dialing a number and putting the charge on a cell phone bill, or using a text message and putting the charge on the text messaging carrier’s bill. The legislation indicates that a telephone bill will satisfy the recordkeeping requirements if it shows the donee organization, date of contribution and amount of the contribution. The general requirements of allowing a taxpayer to claim any charitable deduction should be considered when making a contribution. The changes contained in the 2006 legislation often still surprise some taxpayers who have operated under different rules for a good number of years.
The ability to make a contribution before March 1 allows for certain taxpayers to evaluate their 2009 tax positions before making any Haiti-related charitable deductions, and then determine whether to make a contribution and for what year the contribution will be claimed on a tax return.
Congress made quick work of H.R. 4462, but other significant tax legislation is still awaiting consideration. Congress still has significant work to complete regarding extending several provisions that expired Dec. 31, such as the research tax credit. In an era where we have heard from Washington that research and innovation is key to creating jobs and positioning the country to compete in a global marketplace, provisions such as the research credit may deserve some high priority to allow for companies some certainty in whether such tax benefits are available when evaluating projects and products, and the need to allocate the appropriate monetary and people resources to such projects.
Also, at the end of 2010, there are many expiring tax provisions set to change. These include the top individual federal income marginal rate on long-term assets that generate capital gains (15 percent) and the qualified dividend rate which is tied to the long-term capital gains tax rate.
In addition, the top marginal federal ordinary tax rate for individuals will be reset to the levels that existed at the end of the Clinton administration (39.6 percent for top earning taxpayers). These specific provisions may have an impact on the level of job creation for 2010 and 2011, as many small business owners are organized as flow-through entities (such as S corporations and limited liability companies). As flow-through entities, these businesses are taxed based on the individual tax rate tables. The impact of future taxes, health care costs, health care taxes and the incentives to create jobs, such as the research tax credit, all impact certain decisions of small business
William F. Roth is a tax partner with BDO Seidman. The views expressed above are those of the author and not necessarily those of BDO Seidman LLP. The comments expressed above are general in nature and are not to be considered as any specific tax or accounting advice and cannot be relied upon for the purpose of avoiding penalties. Readers are urged to consult with their professional advisers before acting on any items discussed herein.