On February 5 the Senate Finance Committee passed the Charity Aid, Recovery, and Empowerment (CARE) Bill of 2003. Similar to legislation introduced but not enacted in 2002, the CARE bill contains several provisions that will be of interest to church treasurers, including the following:
(1) Charitable contributions for nonitemizers. In the case of an individual taxpayer who does not itemize deductions, the bill allows a “direct charitable deduction” from adjusted gross income for charitable contributions paid in cash during the taxable year. This deduction is allowed in addition to the standard deduction. The deduction is available only for that portion of contributions actually made during the year that exceed $250 ($500 in the case of a joint return). The maximum deduction is $250 ($500 in the case of a joint return). The deduction would be allowed for 2003 and 2004.
(2) Tax-free distributions from IRAs to charity. The bill provides an exclusion from gross income for IRA distributions from a traditional or a Roth IRA in the case of “qualified charitable distributions.” A qualified charitable distribution is any distribution from an IRA that is made directly to (1) a church or other charity (“direct distributions”), or (2) a charitable remainder trust, a pooled income fund, or a charitable gift annuity (“split interest distributions”). Direct distributions are eligible for the exclusion only if made on or after the date the IRA owner attains age 70 1/2. Distributions to a split interest entity are eligible for the exclusion only if made on or after the date the IRA owner attains age 59 1/2. This provision would take effect in 2004.
(3) Contributions of food inventory. Taxpayers are eligible to claim an enhanced deduction for donations of food inventory to charity.
(4) Charitable mileage rate. The bill would make reimbursements by a church or other charity to a volunteer for the costs of using an automobile in connection with providing donated services excludable from the gross income of the volunteer, provided that (1) the reimbursement does not exceed the business standard mileage rate prescribed for business use (36 cents per mile in 2003), and (2) recordkeeping requirements applicable to deductible business expenses are satisfied.
(5) Annual IRS notices. Most charities are required to file an annual information return with the IRS (Form 990). This form, which is subject to public inspection, contains detailed information about a charity’s finances and operation (including disclosure of compensation paid to officers). Some charities are exempt from filing this form, including churches, some other religious organizations, and charities that normally have gross annual income of not more than $25,000. The CARE bill would require charities that are exempt from filing Form 990 because they normally have annual income of less than $25,000 to provide the IRS with a “notice” each year containing specified information. Failure to file the notice for three years would result in revocation of a charity’s tax exemption. This notice requirement would not apply to churches. It would be effective beginning in 2004.
(6) IRS audits of churches. Under present law, the IRS may begin a church tax inquiry only if an appropriate high level Treasury official reasonably believes, on the basis of the facts and circumstances recorded in writing, that an organization (1) may not qualify for tax exemption as a church, (2) may be carrying on an unrelated trade or business, or (3) otherwise may be engaged in taxable activities. A church tax inquiry is any IRS inquiry to a church to determine if it qualifies for tax exemption as a church or whether it is carrying on an unrelated trade or business or otherwise is engaged in taxable activities. An inquiry is initiated when the IRS requests information or materials from a church contained in church records, other than routine requests for information or inquiries regarding matters that do not primarily concern the tax status or liability of the church itself. The CARE bill clarifies that the church tax inquiry procedures do not apply to contacts made by the IRS for the purpose of educating churches with respect to the federal income tax law governing tax-exempt organizations. For example, the IRS does not violate the church tax inquiry procedures when written materials are provided to churches for the purpose of educating them with respect to the types of activities that are not permissible under section 501(c)(3) of the tax code.
(7) Conventions and associations of churches. Under present law, an organization that qualifies as a “convention or association of churches” is not required to file an annual return (Form 990); is protected by the Church Audit Procedures Act; and is subject to certain other provisions generally applicable to churches. The tax code does not define the term “convention or association of churches.” The CARE bill specifies that an organization that otherwise is a convention or association of churches does not fail to be so merely because the membership of the organization includes individuals as well as churches, or because individuals have voting rights in the organization.
Some leaders in the House of Representatives are opposing the Senate version of the CARE bill because it does not contain a provision specifically allowing religious organizations to make hiring decisions on the basis of religious belief or affiliation. We will alert you to any developments in future issues of this newsletter.
This article first appeared in Church Treasurer Alert, March 2003.