CARES Act Increases Charitable Donation Deduction Opportunities

The novel coronavirus (COVID-19) crisis has taken its toll on everyone, and many businesses have been injured economically. One way the Coronavirus Aid, Relief and Economic Security Act (CARES Act) is trying to help is by increasing available tax deductions for individuals and businesses contributing to charity in 2020. This in turn may boost financial support for the not-for-profit groups that desperately need funds.

Donation deduction basics for individuals

Individual taxpayers can claim a federal income tax deduction for contributions to qualified charities. The catch is that, to do so, they generally must itemize deductions.

Due to changes under 2017’s Tax Cuts and Jobs Act (TCJA), far fewer taxpayers benefit from itemizing. Why? First, the TCJA nearly doubled the standard deduction. The inflation-adjusted amounts for 2020 are $12,400 for singles and $24,800 for married couples filing jointly. Second, the TCJA reduced or eliminated several itemized deductions. As a result, many more taxpayers’ total itemized deductions aren’t exceeding their standard deduction, so they’re better off claiming the standard deduction — thereby eliminating the tax benefit from their charitable donations.

On the flip side, the TCJA has encouraged itemizers to donate more by increasing the limit on charitable deductions for cash contributions from 50% to 60% of adjusted gross income (AGI). If an individual’s contributions for the year exceeds 60% of AGI, then the excess is carried forward and treated as a deductible charitable contribution for up to five succeeding tax years.

Donation deduction basics for businesses

Businesses also may be eligible for a federal income tax deduction for charitable contributions. A corporation’s deduction for cash contributions generally can’t exceed 10% of its modified taxable income. If a corporation’s contributions for the year exceed the 10% limit, the excess is carried forward and treated as a deductible charitable contribution for up to five succeeding years.

A donation of food inventory to a charity 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).

For a C corporation, the deduction for a food inventory donation can’t exceed 15% of the corporation’s income. For other taxpayers, 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 charitable deduction rules:

1. Individuals can claim an above-the-line deduction of up to $300 for 2020 cash contributions made to certain public charities. This rule effectively allows a limited charitable deduction to taxpayers who claim the standard deduction.
2. Individuals can claim a charitable deduction for 2020 cash contributions made to certain public charities equal to as much as 100% of AGI. No connection between the contributions and COVID-19 activities is required. This provision benefits individuals who claim itemized deductions.
3. Corporations can claim a charitable deduction for qualifying 2020 cash contributions equal to as much as 25% of modified taxable income. No connection between the contributions and COVID-19 activities is required.
4. Businesses can claim a charitable deduction for 2020 contributions of food inventory of up to 25% of applicable income. For C corporations, this is 25% of taxable income. For other taxpayers, it’s 25% of the net aggregate income from all businesses from which the contributions were made.

For charitable contributions made after December 31, 2020, the prior (pre-CARES Act) rules will apply.

How the CARES Act affects retirement plan distributions

With a few exceptions, retirement plan distributions made before age 59½ are subject to a 10% penalty, in addition to any income tax that ordinarily would be due on a withdrawal. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides an important new exception for 2020: It waives the 10% penalty — along with providing additional tax advantages that taxpayers age 59½ and older can also benefit from — on COVID-19-related distributions. These generally are 2020 withdrawals made by someone who has been (or whose family has been) infected with COVID-19 or who has been economically harmed by the virus.

Distributions are limited to $100,000 in aggregate and may be re-contributed to the retirement plan over the three-year period starting the day after the withdrawal. Income tax payments on the distribution (if not recontributed) can be spread out over three years. Many additional rules apply, so contact your tax advisor for details.

Retirement plan owners who don’t need funds from their accounts this year can also benefit from the CARES Act. It waives retirement plan required minimum distributions (RMDs) for 2020. RMDs generally apply to taxpayers age 70½ or older (or 72 or older for those who didn’t turn 70½ by Dec. 31, 2019) and to taxpayers of any age who’ve inherited retirement plans (other than from spouses).

Seek advice

Contact our tax professionals at (973) 298-8500 for help forming a strategy for charitable giving this year.