Contained within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is additional support for the nonprofit industry via the expansion of charitable deductions. Included in the legislation are two new tax benefits for individuals and corporations; both are deductions that seek to incentivize taxpayers to not only maintain their philanthropic efforts throughout the COVID-19 crisis, but also increase such actions.
For each new deduction, specific terms must be met in order to be allowed. Specifically:
- Contributions must be made in cash.
- All contributions must go directly to a qualified charity. Donor-advised funds and certain organizations that support charities (509(a)(3) organizations) do not qualify.
Taxpayers utilizing the standard deduction (approximately 90% of all taxpayers) may now take advantage of a new above-the-line deduction. For tax years 2020 and beyond, individuals can take up to a $300 deduction per taxpayer from annual charitable contributions.
For taxpayers that itemize, the deduction limit against adjusted gross income (AGI) for charitable contributions has been temporarily repealed. For 2020 only:
- Taxpayers can deduct up to 100% of their AGI (an increase from 60%).
- A taxpayer can effectively zero out their tax liability by making charitable contributions up to their AGI.
- Any excess deductions not utilized in 2020 can be carried forward for up to five years.
A final consideration for individuals as they review their charitable giving options this year is the qualified charitable distribution (QCD), which allows individuals over age 70½ to direct up to $100,000 from their IRA to a charity. While required minimum distributions (RMDs) have been waived for the current year only, individuals may still use funds in their IRA to make a charitable contribution via a QCD. Doing so will not reduce an RMD as in past years; however, it will still offset taxable income up to the $100,000 limit and can be one of the most tax-advantaged ways to get funds to a charity.
The CARES Act provides corporations the following increased tax deductions in 2020 only:
- Charitable contributions can be deducted up to 25% of taxable income, a considerable increase from the 10% standard.
- If donations above this are made in 2020, the excess amount can be carried forward for up to five years.
- In the case of a partnership or S corporation, each partner/shareholder must separately make their carryover election in order to apply the treatment properly.
- The deductibility of food donations has been raised from 15% to 25% of taxable income.
Please reach out to your BBH relationship team if you have any questions about the impact of the CARES Act on charitable deductions.