Due to the financial challenges brought on by the coronavirus pandemic, many are seeking assistance from charitable organizations. At the same time, fewer people have the resources to donate and support these organizations. To incentivize philanthropy during this difficult time, the recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act) included various provisions relating to charitable contribution deductions for individuals and corporations.
Qualified Charitable Contributions
The charitable giving provisions in the CARES Act apply to Qualified Charitable Contributions.
Qualified Charitable Contributions under the CARES Act are those that are:
- made in cash;
- for which a charitable deduction is otherwise allowed; and
- that are made to certain publicly supported charities.
Contributions made to a non-operating private foundation or a donor advised fund (DAF) do not qualify as Qualified Charitable Contributions.
Allowance of partial above-the-line charitable contributions
The CARES Act allows individuals who do not elect to itemize their deductions to take up to a $300 above-the-line deduction in arriving at Adjusted Gross Income (AGI) for Qualified Charitable Contributions made in 2020.
The intent of this change is to enable taxpayers who claim the standard deduction to take an additional deduction for charitable contributions.
Modification of Limitations on Charitable Contributions in 2020
The CARES Act temporarily modifies the current law limitations on deductions for charitable contributions by individuals who itemize their deductions.
Currently, cash contributions by individuals to public charities are generally limited to 60% of the taxpayer’s AGI. Contributions that exceed this limit can be carried forward for each of the succeeding five years. The CARES Act allows Qualified Charitable Contributions to be deducted up to 100% of AGI for 2020. As under current law, contributions that exceed this limit are available to be carried over to the next five years.
Taxpayers taking advantage of this provision must make an affirmative election on their 2020 tax return. In the case of Qualified Charitable Contributions that flow through from a partnership or S corporation, the election is made separately by each partner or shareholder.
C Corporations can currently deduct charitable donations up to 10% of taxable income without consideration of the charitable contribution. The CARES Act temporarily increases this limitation to 25% of taxable income without consideration of the charitable contribution. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Other Important Details
Donations of appreciated securities or other property do not qualify for the new charitable contribution provisions in the CARES Act, because they are not considered Qualified Charitable Contributions, except for food inventory for C Corporations.
If a taxpayer makes both Qualified Charitable Contributions and non-cash contributions in 2020, the limitations are applied first to the cash donations, and then to the other categories.
If a taxpayer has contribution carryovers from prior years to the 2020 tax year, the current year contributions are deducted first, then the carryover contributions are subject to the normal ordering rules.
Tax Warrior Perspective
Philanthropic taxpayers with traditional IRA accounts should consider a 2020 ROTH IRA conversion. Qualified Charitable Contributions made during 2020 could offset 100% of the income recognized on such conversions.
Similarly, taxpayers anticipating large income recognition events in 2020 should consider making Qualified Charitable Contributions . While this is a tactic often used with DAFs, taxpayers are limited by 30% of their AGI if they are donating appreciated stock to a DAF. The CARES Act increases the ability to shelter large income recognition events in 2020 from 60% to 100% of AGI with Qualified Charitable Contributions.
If you need help modeling out how Qualified Charitable Contributions could be used to lower your 2020 tax liabilities, call on us. In the meantime, continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the COVID-19 pandemic may affect your tax filing, payments, and planning. We encourage you to share the page with others. Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help.