The Individual Retirement Account ("IRA") charitable rollover provision, which allows individuals over the age of 70 years and 6 months (70.5 years) to roll over up to $100,000 from their IRA directly to a qualifying nonprofit without tax penalties, began in 2006 as part of the Pension Protection Act. Since that time, however, the provision had to be renewed each year by Congress. After Congress passed the Protecting Americans from Tax Hikes ("PATH") Act in late 2015, the rollover provision contained in Internal Revenue Code ("IRC") § 408(d)(8) is now permanent effective as of January 1, 2016.
With certainty around the provision's permanent status, older IRA holders can now rely on the charitable rollover as a viable option when performing tax planning for retirement income. This is especially good news for qualifying nonprofits and public charities that can take advantage of the provision as part of their fundraising and business development activities.
IRC 408(d)(8) allows individuals over the age 70.5 years to rollover up to $100,000 from their IRA directly to a qualifying nonprofit without penalty. Furthermore, this rollover is not included in their adjusted gross income, thus it will not be taken into consideration when determining Social Security, Medicare and other income-based benefits for elderly individuals.
Additionally, any rollover contribution also counts toward the required minimum distribution from their IRA accounts. Currently, account holders over 70.5 years are required to take annual minimum distributions from their accounts. The minimum distribution is based on a formula that increases annually. As the law currently stands, non-Roth IRA minimum distributions are treated as taxable income. However, with the charitable rollover, an account holder can contribute to a charity from their IRA without recognizing any individual income.
In order for rollover contributions to qualify for this exception the following, they must meet the following factors:
The contribution must be from a IRA account held by an individual over 70.5;
The contribution must be paid directly to a "public charity" as defined in the IRS code; and
The contribution must be otherwise completely deductible as a charitable contribution.
Currently, all public charities look to benefit from this provision. These include all churches, schools, community health centers, hospitals and hospital-affiliated research facilities. In addition, other charitable organizations can qualify as a public charity when they apply for 501(c)(3) tax exempt status with the IRS if they are able to show that they can reasonably be expected to be public supported, versus relying on a few single donors or groups of donors.
For entities that are not automatic qualifying organizations, there are four tests an entity can use to show that they should be considered public charities.
The 1/3 Test. Pursuant to IRC 170(b)(1)(A) and 509(a)(1), if a charity receives one-third of its support over a measuring period from the public, government support or smaller donations from private (less than 2% of the total), they are considered a public charity.
The 10% Facts & Circumstances Test. Similarly, under this test, if a charity receives at least 10 percent of its support from the public, government, or smaller donations from charities and can show through multiple factors set by the IRS that it operates as a public charity, it would qualify as a public charity.
The Mathematical Support Test. Under the mathematical support test in IRC 509(a)(2), a charity in which most of their support comes from selling services or materials to the public can qualify as a public charity. In order to qualify, a charity cannot receive more than one-third of its support from gross investment income and unrelated business taxable income. In addition, it must receive at least one-third of its total support from donations, membership fees and exempt function gross receipts from its charitable merchandise or services.
Supporting Organization Test. Pursuant to IRC 509(a)(3), an entity can pass the public charity test by qualifying as a supporting organization to another public charity. An organization can do this by (a) showing that it operated exclusively for the benefit and performing the functions of one or public charities, (b) has either a supervisory, operational, controlling relationship with either an public charity or parent organization, and (c) is not controlled by a disqualifying person or entity.
For charitable organizations looking to change their status with the IRS, and believe they qualify due to change in operations, revenue stream or otherwise, they can request a determination letter along with any required reporting documentation that is required.