CARES Act Offers Expanded Charitable Giving Tax Benefits
Americans by and large are a generous people, especially when disaster hits or during other times of crisis.
The current crisis is no different. Whether it's drives to support local businesses, serving or donating to food banks, or the numerous faith groups and other relief organizations reaching out to help those in need, we see this generosity on display everywhere.
To encourage this even more, the Coronavirus Aid, Relief, and Economic Security (or CARES) Act passed at the end of March includes several little publicized, but still important tax incentives for charitable giving.
What follows is a brief synopsis of four tax breaks in the new law for givers:
An Above-the-Line Deduction
Because of the tax reform (TCJA) changes at the end of 2017, many taxpayers stopped itemizing their deductions, at least for federal tax purposes. This occurred because TCJA dramatically increased the federal standard deduction through the year 2025, while limiting or even eliminating certain other deductions.
Effectively, this eliminated federal tax benefits from making charitable donations for most taxpayers who elected to use the new higher standard deduction.
Now, under CARES, an individual can claim what is known as an "above-the-line" deduction of up to $300 for donations made to qualified charitable organizations. It is called this because you can take the deduction right off the top in determining your Adjusted Gross Income (or AGI), whether or not you itemize.
This deduction can be taken for gifts made to any charity, including those not necessarily associated with providing COVID-19 pandemic related relief, with the exception of private foundations or donor-advised funds.
Individual Deduction Limits
The tax code places a limit on an individual's annual deduction for monetary contributions of 60 percent of AGI through 2025, at which point it is scheduled to return to the pre-TJCA level of 50%. CARES raised this deduction limit to 100 percent of AGI, but only for 2020.
In other words, a taxpayer who itemizes can literally donate his or her entire income for the year and write off the full amount of the charitable donations, as long as they are gifts of cash. If more than 100% of AGI is given, the excess is carried over for up to five years.
Again, as with the deduction for non-itemizers, this provision doesn't apply to private foundations or donor-advised funds.
Corporate Deduction Limit
Just as with individuals, there are also limits on deductions for charitable contributions made by corporations. The annual deduction by a corporation is limited to 10% of corporate taxable income.
So, for example, a corporation with taxable income of $250,000 would be limited to a deduction of $25,000, with any excess carried over for up to five years.
Under CARES, for 2020, the annual ceiling for corporate deductions is increased to 25% of taxable income. Returning to our previous example, a corporation with taxable income of $250,000 can in 2020 deduct up to $62,500. Quite an increase!
The five-year carryover rule still applies.
And finally, you may have seen the recent news reports of the incredibly long lines at food banks and other food distribution outlets of people waiting to receive free food. The need is so great!
To encourage donations to help feed the hungry during this time, the tax benefit for donating food was also expanded.
Tax law prior to CARES already provided for 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 on the donated food if it had been sold at fair market value); or
• Twice the cost of the donated food.
Pre-CARES, the deduction was limited to 15 percent of the corporation's taxable income. CARES, however, increased the limit to 25 percent of taxable income for 2020. Note that If a corporation deducts a food contribution, it must reduce its cost of goods sold by the original purchase price of the donated food, otherwise a double deduction of sorts would result.
I think we would all agree that there is great benefit (and here I'm talking nonmonetary) to helping those in need when we have the means to do so. If nothing else, it just feels good! These additional tax benefits provided by CARES are an incentive to do just that, and may just be a bit of icing on the cake!