In Notice 2020-5, the IRS announced mileage rates for use in computing deductability in 2020. The 2020 mileage rate for business is 57.5 cents per mile. The rate is 17 cents per mile for moving and medical travel. For qualified charitable travel, the rate is 14 cents per mile.
Business mileage for employees was previously deductible as a miscellaneous expense. Miscellaneous expense deductions were permitted if they were over 2% of adjusted gross income. However, the Tax Cuts and Jobs Act (TCJA) repealed miscellaneous expense deductions, including the employee business mileage deduction.
Because employee business mileage is not deductible, most employers reimburse their employees for mileage. The employer must be able to show the mileage was an “ordinary and necessary” business expense. Employees should record the date, miles driven, the start and end locations and how the travel relates to their job responsibilities. Reimbursements in 2020 are permitted at a rate of 57.5 cents per mile.
Moving and medical mileage were also affected by the TCJA. Moving mileage is generally not deductible for most taxpayers. An exception is available for active duty military who move due to a permanent change of station. They may deduct 17 cents per mile.
Medical travel is deductible, but subject to a 7.5% floor. If the total medical expenses exceed 7.5% of adjusted gross income, the taxpayer should record the date, miles driven, start and end points and the medical purpose of each trip. It may be helpful to retain receipts to document that medical purpose.
Charitable travel is deductible at 14 cents per mile. Once again, “reliable written records” should include the date, miles, start and end points and the charitable purpose of each trip. Taxpayers will need to itemize to take their mileage and other charitable deductions.
The IRS offers specific guidelines on IRS.gov
for deducting charitable travel. The charity work must be real and substantial throughout the trip. Taxpayers may not deduct mileage they have only nominal duties. They may not deduct the value of their time or services. Some types of travel do not qualify. Taxpayers may not deduct their mileage if a significant part of the trip involves recreation or vacation.
Gifts of Bitcoin and Cryptocurrency
On December 31, 2019, the IRS updated the Frequently Asked Questions (FAQs) on IRS.gov
to expand guidance on virtual currency. The Service explained, “Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.”
Common virtual currencies include Bitcoin and Ethereum, but there are over 1,600 virtual currencies in existence. Each month there are new virtual currencies published. In Notice 2014-21, the Service stated that “virtual currency is treated as property” and general tax principles are applicable for transactions involving virtual currency.
Many donors now own virtual currencies and have inquired about making gifts of cryptocurrency to a nonprofit. In order to accept the gift, a nonprofit must establish an institutional virtual wallet to receive virtual currency. After receiving a virtual currency transfer, the nonprofit will generally sell the cryptocurrency and receive cash.
Both donors and nonprofits need to understand how to handle virtual currency gifts. The IRS FAQs address the following nonprofit questions.
- Q 33 -- Will a donor have to recognize gain? The donor will not recognize income or gain from a gift of virtual currency. The virtual currency gift is similar to appreciated property gifts with regard to the bypass of gain.
- Q 34 -- How is the deduction calculated? Virtual currency gift deduction rules are similar to those for appreciated property gifts. Gifts of virtual currency held more than one year are deductible at fair market value. Gifts of virtual currency held less than one year are deductible at cost basis.
- Q 35 -- What are the rules for virtual currency gift substantiation? The nonprofit must provide a contemporaneous written acknowledgement if the gift value is $250 or more. If the gift value is over $5,000, the donor must obtain a qualified appraisal and file Form 8283, Noncash Charitable Contributions. The nonprofit must sign Form 8283. The signature of the nonprofit acknowledges receipt of the gift, but does not confirm the reported valuation for the charitable deduction.
- Q 36 -- What is the donor's reporting requirement? Gifts of virtual currency are reported on Schedule M of Form 990. If the nonprofit signs Form 8283 and transfers the virtual currency within three years, it must file Form 8282, Donee Information Return.
Gifts of virtual currency are still rare, but with the proliferation of cryptocurrencies, more donors will be making these gifts. Notice 2014-21 creates property status for virtual currency gifts. Therefore, a gift such as Bitcoin is not categorized as a publicly traded stock, even though it is widely traded. Bryan Clontz of Charitable Solutions, LLC, has done over 300 appraisals of virtual currency gifts. He notes, “The charities around the edges are just not seeing those kind of donations enough to understand that this is deemed property and should not be treated like qualified appreciated stock.”
Exempt Organizations 2020 Agenda
Independent Sector, The National Council of Nonprofits, The Council on Foundations and other associations are focused on their 2020 agenda. While the appropriations bill that passed in December 2019 repealed the Sec. 512(a)(7) parking tax and simplified the private foundation excise tax, there remain four main priorities for 2020.
- Universal Charitable Deduction – The above-the-line charitable deduction will continue to be a priority. Because the Tax Cuts and Jobs Act of 2017 doubled the standard deductions, the number of itemizers declined over the past three years. About 30% of taxpayers itemized in 2017 and an estimated 10% will itemize in 2020. With fewer itemizers, there has been a decline in the number of annual fund donors. The universal charitable deduction is a solution for this challenge. David L. Thompson of the National Council of Nonprofits noted, “2020 will be devoted to building support for this essential solution.”
- Sect. 512(a)(6) Silo Tax Repeal – Under Sec. 512(a)(6), nonprofits must maintain separate records and pay tax on each separate legal entity. The gains on one trade or business may not be offset against losses on another subsidiary. Thompson noted, “The silo tax forces nonprofits – but not for-profits -- to keep every trade or business separate for accounting and tax purposes and pay taxes on each separately.” Thompson considers this a punitive tax and seeks clarification from Treasury on how it should function.
- Overreach of Executive Compensation Tax – Under Sec. 4960, there is a 21% excise tax on compensation over $1 million for officers of applicable tax-exempt organizations (ATEOs). Some ATEOs may be affiliated with private corporations. If officers of the private corporation volunteer for the ATEO, the 21% excise tax may apply.
- Legacy IRA – The Legacy IRA Act expands the options for IRA gifts. It is supported by a coalition of DC organizations and associations. The Legacy IRA Act would permit IRA owners over age 65 to transfer up to $400,000 per year from an IRA to a charitable gift annuity, remainder unitrust or remainder annuity trust.
The challenge for all of these agenda items is that current legislative policy requires a “pay-for” to offset the cost. Nonprofits will need to find creative and politically acceptable offsets to move forward with this 2020 agenda.
Applicable Federal Rate of 2.0% for January -- Rev. Rul. 2020-1; 2020-3 IRB 1 (17 Dec 2019)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2020. The AFR under Section 7520 for the month of January is 2.0%. The rates for December of 2.0% or November of 2.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.