Ofer Lion, JD
Partner, Seyfarth Shaw LLP
Dustin W. Lauermann, JD
Associate, Seyfarth Shaw LLP
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) that became law on March 27, 2020 provides several enhanced tax incentives for charitable giving in 2020 (and beyond) by individuals and corporations. The following provisions are addressed in this Legal Update:
- Super-deductible cash contributions. No adjusted gross income-based cap on certain charitable cash contributions made in 2020 only (Qualified Contributions). Taxpayers have the opportunity to “zero out” their taxable income for the year and even carry over excess contributions to future years.
- Increased cap on charitable contribution deductions by corporations. Deduction limit for corporations is up from 10% to 25% of taxable income for Qualified Contributions made in 2020 only. Importantly, employer contributions to employer-sponsored disaster relief funds hosted by community foundations and other public charities are eligible for this increased limit. While contributions to donor-advised funds are not Qualified Contributions, these employer-sponsored disaster relief funds are excluded from the definition of donor-advised fund.
- $300 charitable contribution deduction available to all taxpayers. All taxpayers, whether they itemize or not, are eligible for an “above the line” charitable contribution deduction of up to $300 for Qualified Contributions. As part of the CARES Act, this is a call to all Americans who can afford it to make a cash contribution to charity this year. Notably, this is not a temporary provision; it is effective for all taxable years beginning after 2019.
- “Qualified Contributions”. Qualified Contributions must be made in cash to organizations described in section 170(b)(1)(A) of the Internal Revenue Code, including exempt hospitals, churches, public charities, private operating foundations, and “flow-through” private foundations. Contributions to private non-operating foundations, supporting organizations and donor-advised funds are not Qualified Contributions. Of course, non-cash contributions generally, and cash contributions to those excluded entity types, remain eligible for charitable contribution deductions subject to the usual rules.
- Minimum distribution requirements from 403(a), 403(b), 457(b), and individual retirement plans. These have been waived for 2020, but we hope that those planning to direct these distributions directly to a 501(c)(3) (and avoid paying taxes on such amounts) will still do so.
For a description of CARES Act provisions specific to nonprofit organizations, please reference the Nonprofit Guide to the CARES Act - the link is in the first footnote, below.
Increased Cap on Deductions for Donations of Cash and Food Inventory
Cash Contributions. The CARES Act increases the charitable contribution deduction for Qualified Contributions made in 2020 from 10% to 25% of taxable income for corporations, and eliminates the cap on individuals entirely.
With no cap for 2020 Qualified Contributions, individuals may be able to “zero out” all 2020 tax liability, and even carry forward excess contributions (beyond their 2020 adjusted gross income) to be used to offset tax liability for the next 5 years (then subject to the usual caps). Normally, the deduction cap for Qualified Contributions by individuals is 60% of adjusted gross income.
For corporations, as noted above, employer contributions to employer-sponsored disaster relief funds hosted by community foundations and other public charities can constitute Qualified Contributions eligible for this increased limit.
Contributions of Food Inventory. The CARES Act increases the charitable contribution deduction limitation for food inventory contributions made in 2020 from 15% to 25% of a taxpayer’s aggregate net income from all trades or businesses from which the food inventory contributions were made (in the case of a corporation, 25% of taxable income).
Above the Line Deduction for Charitable Contributions
Since the enactment of the Tax Cuts and Jobs Act in 2017, which increased the standard deduction, the amount of charitable contributions made to charitable organizations has decreased, presumably in part because far fewer people have been able to take advantage of the tax incentive for doing so - the charitable contribution deduction is only available to those few remaining taxpayers who itemize their deductions.
In a modest amount, the CARES Act re-incentivizes charitable giving by creating a partial “above the line deduction” for Qualified Contributions up to $300. That makes the deduction available to all taxpayers, including those who take the “standard deduction” and do not itemize.
Unlike other provisions in the CARES Act which sunset at various points, this one is a permanent change to the Code.
Minimum Distribution Requirements Temporarily Waived
The CARES Act has temporarily waived the minimum distribution requirements for 2020 from 403(a), 403(b), 457(b), and individual retirement plans regardless of whether the taxpayer has been impacted by the COVID-19 pandemic.
In some instances, individuals would have elected to donate the amount of the required minimum distribution to a tax-exempt organization and, in doing so, avoid paying taxes on the amount. Since a required minimum distribution is not required in 2020, some tax-exempt organizations that normally receive charitable contributions from these required minimum distributions may see a decline in those gifts.
The CARES Act provides some strong incentives to charitable giving here in 2020 (and beyond in the case of $300 Qualified Contributions). Donors should contact their attorneys and financial advisors to determine how to best take advantage of this unique opportunity.
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