Charitable organizations, like many for-profit businesses, are facing significant hardships due to the COVID-19 pandemic. Recognizing that individuals and businesses want to support charities in these times of need, lawmakers included in the Coronavirus Aid, Relief, and Economic Security Act a new above-the-line deduction for non-itemizers and modified certain limitations on the income tax charitable deduction to encourage donors to give in 2020 .
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act or CARES Act, which made changes to encourage charitable giving to nonprofits. This is the third relief bill addressing the pandemic and its fallout and it includes revisions to the Internal Revenue Code that are intended to encourage charitable giving, particularly of cash donations and food. This targeted relief recognizes the important role charities play during the pandemic and provides additional tax benefits for taxpayers supporting charities.
New Universal Charitable Contribution Deduction for Individuals
Because of the significant increase to the standard deduction for individuals after the enactment of the 2017 Tax Act, it is estimated that more than 85 percent of taxpayers will not claim itemized deductions on their federal income tax returns for tax year 2019. As a result, many people have learned they did not or will not receive any direct tax benefit for their 2019 charitable contributions and may not receive tax benefits for future years.
To encourage charitable giving among this group of taxpayers and to further support relief efforts, Congress included a provision in the CARES Act that creates a new partial above-the-line deduction for cash contributions up to $300 to certain charitable organizations for taxpayers that elect not to itemize deductions. Note that, for the contribution to be deductible, it must be given to a charitable organization described in Internal Revenue Code section 170(b)(1)(A). Qualifying donations do not include contributions to a supporting organization or to a sponsoring organization for the establishment of a new donor advised fund or to be added to an existing donor advised fund.
It remains uncertain whether Congress intended to allow this new charitable deduction for non-itemizers in future years, or if this is a one-time incentive as part of the COVID-19 disaster response. For now, the hope is that this change will benefit those nonprofits that traditionally rely upon a volume of smaller-level contributions, including those charities that provide direct services to the needy, healthcare organizations such as nonprofit hospitals, and religious organizations.
Raising the Limits on Deductions for Cash Charitable Contributions During 2020
The CARES Act temporarily modified the percentage limitations on the income tax charitable deduction for cash contributions to certain charities available to individuals who are itemizers and corporations if these taxpayers elect to have these provisions apply for the 2020 tax year. For 2020, individuals may deduct qualified contributions to the extent of their contribution base (i.e., the individual’s 2020 adjusted gross income without regard to any net operating loss carryback to 2020). This provision is very favorable to those donors who wish to make large cash contributions in 2020, the deductibility of which might otherwise have been curbed due to the percentage limitations. The election would allow much more to be deducted in 2020 and less carried forward for deduction in future years.
For corporations, the percentage limitation on the corporate income tax charitable deduction increased from 10 to 25 percent of the corporation’s taxable income for 2020. In the case of charitable contributions by partnerships or S corporations, each partner or shareholder must separately elect to use the modified percentage limitations.
Any charitable contribution exceeding the limits discussed above may be carried forward and used in later years subject to certain limits.
Exclusions. Charitable contributions carried over from a prior tax year (before 2020) are excluded from this temporary relief and are subject to previous limitations in the tax code. And charitable contributions to private non-operating foundations, supporting organizations and sponsoring organizations to fund donor advised funds do not qualify for the modified percentage limitations for 2020.
Finally, the CARES Act raises the applicable limits on the amount of the allowed deduction for food inventory from 15 percent to 25 percent for the taxable year, thereby encouraging donations of food to organizations that provide for those in need.
These new provisions will help charities raise funds, currently to meet the needs arising as a result of the COVD-19 pandemic. But many charities are in dire financial need and looking to Congress for additional incentives that could be included in future legislation to address the effects of the COVID-19 pandemic.