Two new elections: charitable contributions and tax-free incorporations.

• Author: Josephs, Stuart R.
• Position: Tax relief to hurricane victims

On Sept. 23, President Bush signed the 2005 Katrina Emergency Tax Relief Act (P.L. 109-73) into law. Most of the act's provisions are Katrina-related, providing tax relief and assistance to hurricane victims.

One significant provision not solely Katrina-related temporarily suspends the percentage of income limitation on charitable contributions by individuals.

Under existing IRC Sec. 170(b)(1)(A), an individual's annual itemized deduction for cash contributions to public charities cannot exceed 50 percent of the individual's contribution base (adjusted gross income, without any net operating loss carryback). Excess contributions are carried over for five years. Sec. 68 reduces itemized deductions for high-income taxpayers.

However, Katrina Act Sec. 301 allows individuals to deduct "qualified contributions" up to 100 percent of their contribution base--to the extent they exceed other deductible charitable contributions. Excess contributions are eligible for the five-year carryover. Qualified contributions are not considered itemized deductions under Sec. 68.

Qualified Contributions: A "qualified contribution" is any charitable cash contribution paid to a public charity from Aug. 28, 2005-Dec. 31, 2005. (For this purpose, a supporting organization described in Sec. 509(a)(3) is not a public charity.) Also, the individual must elect the application of Katrina Act Sec. 301. In the case of a partnership or S corporation, this election is made separately by each partner or shareholder.

Note: Under Katrina Sec. 301(d)(1)(B), a qualified contribution by a corporation must be for Hurricane Katrina relief efforts.

Nonqualified Contributions: Qualified contributions exclude contributions for establishing new, or maintaining existing, segregated funds or accounts if the donor (or the donor's appointee or designee) has, or reasonably expects to have, advisory privileges regarding distributions or investments because of the donor's status as donor.

Corporate Limitation: Under existing Sec. 170(b)(2), a regular C corporation's deduction for charitable contributions cannot exceed 10 percent of its taxable income (without deducting charitable contributions, special deductions for dividends received, premiums on convertible bond repurchases, and net operating or capital loss carrybacks). Excess contributions are carried over for five years.

Under Katrina Act Sec. 301, a regular C corp can deduct qualified Katrina-related contributions up to 100 percent of...