What Tax Breaks Does the CARES Act Offer for Charitable Giving?

During this time of national crisis, well-meaning individuals and business owners are pitching in, offering their support through various means. Accordingly, the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March includes several tax incentives for charitable giving.

Apr 23rd 2020
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During this time of national crisis, well-meaning individuals and business owners are pitching in, offering their support through various means. Accordingly, the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March includes several tax incentives for charitable giving. Following is a brief summary of four key tax breaks for donors in the new law.

1. Above-the-Line Deduction: Due to changes in the Tax Cuts and Jobs Act (TCJA), fewer taxpayers are itemizing deductions than they did in the recent past. Essentially, the TCJA scaled back or suspended certain deductions for 2018 through 2025 while substantially increasing the standard deduction during the same time period. Thus, many donors who are currently opting for the standard deduction get zero tax benefit for their generosity—until now.

Under the CARES Act, an individual can claim an above-the-line deduction of up to $300 for donations made to qualified charitable organizations. As a result, donors may be entitled to a charitable deduction whether or not they itemize. The charity doesn’t have to be associated with assistance relating to the COVID-19 pandemic.  However, the deduction isn’t available for contributions to private foundations or donor-advised funds (DAFs). 

The first $300 donated in 2020 goes toward this deduction. So, itemizers will benefit from the deduction before claiming any other donations on Schedule A. Any excess is carried over for five years. Note: It is not yet clear if this deduction will extend beyond 2020. Expect IRS guidance on this matter shortly.

2. Individual Deduction Limit: Among other restrictive provisions, the tax code limits an individual’s annual deduction for monetary contributions to 60 percent of adjusted gross income (AGI). This limit was raised from 50 percent of AGI for 2018 through 2025 by the TCJA. Even better: The CARES Act boosts the deduction limit to 100 percent of AGI for 2020.

In other words, a taxpayer who itemizes can generally write off the full amount of his or her charitable donations of cash or cash-equivalents this year. Any excess above 100 percent of AGI is carried over for up to five years. Note: As with the deduction for non-itemizers, this provision doesn’t apply to private foundations or DAFs.

3. Corporate Deduction Limit: The tax law also imposes limits on deductions for charitable contributions made by corporations. Notably, the annual deduction for gifts by a corporation can’t exceed 10 percent of its taxable income. For example, a corporation with taxable income of $10 million is limited to a deduction of $1 million. Any excess is carried over for up to five years.

Under the CARES Act, the annual threshold for corporate deductions is increased to 25 percent of taxable income for 2020. Going back to our previous example, a corporation with taxable income of $10 million could write off up to $2.5 million. The rule for carryovers still applies. Note: Charitable donations must be properly substantiated (e.g., a written acknowledgement from the charity is required for each monetary gift of $250 or more).

4. Food Donations: Currently, there’s a groundswell for donating to charities that feed the hungry. The tax law already authorizes a deduction for corporations that donate “apparently wholesome food” to a qualified charitable organization for the care of the ill, needy or infants. This deduction is equal to the lesser of

  • The cost of the donated food, plus half of the appreciation (i.e., the gain if the donated food were sold at fair market value); or
  • Twice the cost of the donated food

Normally, the deduction is limited to 15 percent of the corporation’s taxable income, but the CARES Act increases the threshold to 25 percent of taxable income for 2020. Note: If a corporation deducts a food contribution, it must reduce its cost of goods sold by the original purchase price of the donated food.

Keep your clients apprised of these tax changes for charitable donations in the CARES Act. Help to coordinate tax strategies based on these and other provisions.

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