A closer look at the sweeping $680 billion tax deal enacted in December, and what this legislation means for nonprofits.

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Tax Insights
Legislation gives nonprofits new benefits and burdens
The sweeping $680 billion tax deal enacted in December made permanent and enhanced
many of the tax benefits that help not-for-profit entities, but it also brought new
restrictions and reporting requirements.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) will affect most tax-
exempt entities, including those involved in higher education, community development,
conservation, social services and health care. The PATH Act makes permanent many of
the tax provisions that encourage charitable giving, providing a boost to organizations that
rely on donations. The bill also changes several benefit plan and information reporting
requirements applying to tax-exempts and makes a number of significant changes
affecting higher education institutions.
Charitable giving
The tax code provides significant incentives to encourage charitable giving, but many of
these provisions had been temporary and available only under short-term extensions. The
provisions were often extended only retroactively, undermining their incentive effect.
These provisions last expired at the end of 2014. The PATH Act reinstates, makes
permanent and even enhances the following provisions that encourage giving to various
types of organization.
 Tax-free distributions from IRAs — The bill makes permanent the provision
allowing taxpayers age 70½ and older to make annual tax-free distributions of up
to $100,000 from an individual retirement account (IRA) directly to charity. The
frequent restorative extension of this provision had made it difficult for taxpayers
to use it, so the new permanent extension could help increase giving.
 S corporation basis adjustments for charitable contributions — The bill
makes permanent the rule allowing favorable basis adjustments for shareholders
of an S corporation after a charitable donation of property. Tax-exempts that rely
on the donations from privately held business could see increased help now that S
corporation owners have assurance regarding the tax treatment of contributions
of property.
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 Charitable deductions for food inventory — The bill makes permanent the
enhanced deduction for contributions of food inventory. In addition, it enhances
the deduction by increasing the charitable percentage limitation to 15% (with
exceptions) and allowing contributions in excess of 15% to be carried forward for
five years. It also includes presumption on the tax basis and valuation of food
inventory. The provision should help food banks and other social service not-for-
profits.
 Conservation easements — The bill makes permanent the increased percentage
limits and extended carryforward period for qualified contributions of
conservation easements. It also includes a special rule extending the enhanced
benefit for farmers and ranchers to Alaska Native Corporations. The changes
should help conservation organizations. The temporary nature of the enhanced
deduction and its frequent short-term and retroactive extensions made past tax-
planning on these complex transactions difficult for donors.
Benefit plans and information reporting
While not-for-profits typically do not pay income tax, they still must comply with the
extensive rules on benefit plans and information reporting that affect all businesses. The
PATH Act makes three significant changes that affect tax-exempts.
 Parity for the transit fringe benefit exclusion — The bill makes permanent
and reinstates the increased exclusion from income for employer-provided mass
transit benefits. The allowable fringe benefit for transit is now equal to the
parking allowance and indexed for inflation. The monthly limit on the exclusion
for combined transit pass and vanpool benefits is now $250 in 2015 and $255 in
2016. The IRS has already released procedures for employers to claim payroll tax
refunds for 2015 transit benefits provided in excess of the previous $130 limit.
 Accelerating reporting on remuneration — The bill requires employers to file
employee wage and nonemployee compensation statements (Forms W-2, W-3
and 1099-MISC) to the IRS and Social Security Administration by Jan. 31, a day
before they are due to recipients. The forms were previously not due to the
agencies until the end of February if filing on paper and the end of March if filing
electronically. The provision is effective for calendar year 2016 returns to be filed
in 2017.
 Safe harbor for de minimis errors on information returns — The bill creates a
new de minimis safe harbor so that any single reporting error of less than $100 or
withholding error of $25 is not penalized and does not need to be corrected. The
provision takes effect for information returns and payee statement furnished after
Dec. 31, 2016.

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Higher education
The PATH Act enhances and makes permanent many of the generous tax benefits for
those pursuing a higher education, but it comes at a price for the institutions, which now
face new reporting requirements. The provisions that will help students fund their
education include the following:
 American Opportunity Tax Credit — The bill makes the American
Opportunity Tax Credit (AOTC) permanent. The AOTC was scheduled to expire
and revert to the Hope Scholarship credit at the end of 2016. It provides a 100%
credit on the first $2,000 of qualified tuition and related expenses, and 25% on
the next $2,000. It is partially refundable, available for up to four years per
student and has a higher phaseout threshold than the Hope Scholarship Credit.
Unfortunately, the provision comes with new restrictions. Students must receive a
Form 1098-T with a valid employer identification number (EIN), and educational
institutions have new reporting rules, discussed in the following.
 Above-the-line deduction for qualified tuition and related expenses — The
bill retroactively reinstates the above-the-line deduction for expenses related to
higher education for 2015 and extends it through the end of 2016.
 Section 529 plans — The bill expands Section 529 plans by making computer
and related costs eligible, segregating distributions from separate accounts for
determining if they are included in income and exempting tuition refunds from
tax if recontributed to the plan within 60 days.
In addition, the bill clarifies the charitable status of the qualifying agricultural research
organizations tied to colleges and universities, and allows certain payments received by
students at a qualified work college to be excluded from gross income. The bill also
imposes the following new reporting requirements on higher education institutions.
 ITIN rules — The bill includes new rules for individual taxpayer identification
numbers (ITINs) that affect the colleges and universities that are eligible
acceptance agencies for ITIN applications. The bill clarifies the ITIN application
process and institutes ITIN audit requirements and other procedures to ensure
the accuracy and the effectiveness of the application. It will also automatically
expire certain unused ITINs and require renewals on a staggered schedule.
 AOTC reporting — The bill pairs the new requirements for students claiming
the AOTC with new reporting rules. Educational institutions are now required to
provide their EINs on the Form 1098-T for expenses made after Dec. 31, 2015,
for academic periods beginning after that date. Higher education institutions are
also now required to report on Form 1098-T only the aggregate amount of
qualified tuition and related expenses received during the calendar year. The
provision eliminates the option to report the amount billed for qualified tuition

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and related expenses, and is effective for expenses paid after Dec. 31, 2015, for
education furnished in academic periods beginning after Dec. 31, 2015.
New markets tax credit
The bill extends the new market tax credit for five years through 2019 with an annual
allocation of $3.5 billion. It also extends the carryover period for unused new market tax
credits for five years, through 2024. The credit remains available to taxpayers investing in
the stock of a corporation or a capital interest in a partnership directly from a qualified
community development entity.
Next steps
Many of the changes are already effective for the 2016 tax year, and non-for-profits must
ensure they comply with these rules immediately. Some of the other provisions may create
new fundraising opportunities and future reporting challenges. Organizations should
begin immediately considering how the changes affect them.
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