The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various tax benefits to both individuals and corporations, including an increase in allowable charitable deductions. These provisions promote donors to act upon their charitable intent this year, whether such intent is related to COVID-19 aid or any other meaningful charitable purpose.
For individuals who do not itemize deductions, the CARES Act provides a new above-the-line deduction for qualified charitable contributions up to $300 annually. This provision is not set to expire after 2020, so individuals may take advantage of this deduction in future years as well. To qualify, the contribution must be made in cash to a qualified public charity (which includes most public charities except for donor advised funds and certain supporting organizations) (“Qualified Charity”).
The CARES Act also provides benefits for individuals and corporations who itemize deductions when such taxpayers make a contribution of cash to a Qualified Charity and elect for such benefits to apply (“Qualified Contribution”).
For individuals who itemize deductions in 2020, the CARES Act changes the cap on a Qualified Contribution from 60 percent of the taxpayer’s contribution base (i.e. adjusted gross income computed without regard to any net operating loss carryback) to 100 percent of the taxpayer’s contribution base.
Thus, an individual who itemizes deductions may deduct a Qualified Contribution to the extent such contribution does not exceed the individual’s contribution base. Generally, an individual may carry over and deduct the excess Qualified Contribution over the following five-year period. In the case of a partnership or S-corporation, the election for such benefits to apply must be made separately by each partner or shareholder.
For corporations, the CARES Act changes the limitation from 10 percent to 25 percent of the corporation’s taxable income on the deduction for a Qualified Contribution for 2020. Thus, a corporation may deduct a Qualified Contribution to the extent such contribution does not exceed 25 percent of the corporation’s taxable income. The corporation will also be able to carry over and deduct the excess Qualified Contribution in the following five years, subject to standard limitations.
It is important to note that although the potential deduction for a Qualified Contribution is up to the taxpayer’s contribution base, the allowable deduction will be reduced by other charitable donations throughout the year.
The CARES Act also temporarily waives the required minimum distributions for certain defined contribution plans and individual retirement plans. Although an individual may wish to take advantage of this waiver, an individual above the age of 59½ (i.e. an individual who would not be subject to a 10 percent penalty for a non-coronavirus-related distribution) who itemizes deductions may consider taking advantage of the deduction for a Qualified Contribution up to his or her contribution base (as described above). If such individual receives a retirement plan distribution and makes a Qualified Contribution with the distribution, the benefit to the recipient Qualified Charity would be accelerated—perhaps allowing the donor to see the benefits of the Charitable Contribution during his or her lifetime—and the income tax that would be imposed on the individual or a non-charitable beneficiary from a taxable retirement plan distribution in the future would be reduced.
For an individual over the age of 70.5, Qualified Charitable Distributions are still a viable option to transfer up to $100,000 (reduced by certain post-age 70.5 deductions) per year directly to a Qualified Organization. The amount transferred will be excluded from the individual’s gross income.
Finally, the CARES Act changes the limitation on the deduction allowed for the charitable contribution of qualifying food inventory from a taxpayer’s trade or business during 2020 from 15 percent to 25 percent of (i) a C corporation’s taxable income (defined in the same manner referenced in footnote 1) and (ii) a non-C corporation taxpayer’s aggregate net income from all trades or businesses from which such contributions are made (computed without regard to charitable deductions).
Individuals and corporations may consider accelerating the fulfilment of their charitable intent during 2020 to both help charitable organizations now and benefit from the increased allowable charitable deductions under the CARES Act.
Diana L. Berlin and Colton F. Castro are attorneys with Williams Parker, which has had its roots in Sarasota for nearly a century. Diana and Colton help individuals and families accomplish their goals through comprehensive estate planning and estate and trust administration. Both hold an LLM in Taxation in addition to their JD.
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[1] Please note that taxable income for such purposes is calculated without regard to certain net operating loss carrybacks, capital loss carrybacks, and various other factors.
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