The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes several changes that encourage charitable giving during the coronavirus (COVID-19) crisis. This is welcome news for certain public charities, including churches, educational organizations, hospitals, medical research organizations and food banks. Here's an overview of the tax rules for deducting charitable contributions — and how they've temporarily changed for 2020.
Background on Deductions for Individuals
The tax law allows individuals who itemize to claim a federal income tax deduction for making qualified contributions to certain public charities. However, from 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction to $12,000 for single filers and $24,000 for joint filers. (These amounts are adjusted annually for inflation. For 2020, they are $12,400 for singles and $24,800 for joint filers.)
The TCJA also reduces or eliminates several itemized deductions. As a result, millions of taxpayers who previously itemized deductions claimed the standard deduction for 2018 and 2019, thereby eliminating the tax benefit from their charitable donations.
On the flipside, the TCJA also encourages charitable giving by increasing the income-based limits on charitable deductions of cash for individuals from 50% to 60% of adjusted gross income (AGI). If the aggregate amount of an individual's contributions for the year exceeds 60% of AGI, then the excess is carried forward and is treated as a deductible charitable contribution in each of the five succeeding tax years.
Background on Deductions for Businesses
Businesses also may be eligible for a federal income tax deduction for charitable contributions. Under tax law, a corporation's charitable deduction for cash contributions generally can't exceed 10% of its taxable income, as computed with certain modifications. If a corporation's charitable contributions for a year exceed the 10% limitation, the excess is carried over and deducted for each of the five succeeding years in order of time, to the extent the sum of carryovers and contributions for each of those years does not exceed 10% of taxable income.
A donation of food inventory to a charitable organization that will use it for the care of the ill, the needy or infants is deductible in an amount up to:
•The food inventory's basis, plus
•Half the gain that would be realized on the sale of the food (not to exceed twice the basis).
In the case of a C corporation, the deduction can't exceed 15% of the corporation's income. In the case of a taxpayer other than a C corporation, the deduction can't exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer's charitable deductions for the year.
CARES Act Changes
The CARES Act makes four significant liberalizations to the rules governing charitable deductions:
1. For 2020, individuals will be able to claim an above-the-line deduction of up to $300 for cash contributions made to certain public charities. This rule effectively allows a limited charitable deduction to taxpayers who claim the standard deduction (rather than itemizing deductions) on their 2020 federal income tax returns.
2. For 2020, the limitation on charitable deductions for individuals that's generally 60% of AGI doesn't apply to cash contributions made to certain public charities. Instead, an individual's qualifying contributions can be as much as 100% of AGI for 2020. No connection between the contributions and COVID-19 activities is required. This provision will benefit individuals who claim itemized deductions on their 2020 federal income tax return.
3. The limitation on charitable deductions for corporations that's generally 10% of modified taxable income doesn't apply to qualifying contributions made in 2020. Instead, a corporation's qualifying contributions can be as much as 25% of modified taxable income. No connection between the contributions and COVID-19 activities is required.
4. For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
These CARES Act changes are for contributions made by individuals and businesses during the 2020 tax year only. For charitable contributions made after December 31, 2020, the prior (pre-CARES Act) rules will apply.
Reap the Benefits
Have you been thinking about donating to a charity in the wake of the COVID-19 crisis? Philanthropic individuals are usually motivated by doing good, not tax benefits. But the favorable changes to the charitable contribution rules for individuals and businesses provide a well-deserved bonus. Contact your HK tax advisor at 330-453-7633 if you'd like to discuss your charitable-giving strategy for 2020.