On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act provides various forms of economic relief for individuals and businesses. This alert summarizes the provisions applicable to charitable income tax deductions.
In general, the CARES Act increases the amount of deductions that can be claimed by individuals and businesses for charitable contributions, provided the contributions satisfy the definition of "qualified charitable contributions." These benefits are not available when contributions are made to donor advised funds, supporting organizations and many non-operating private foundations. Therefore, a taxpayer must know the type of charitable organization and other requirements imposed by the tax law in order to determine whether or not an increased charitable income tax deduction can be claimed under the CARES Act provisions.
Qualified Charitable Contributions
The CARES Act increases limitations applicable to income tax deductions for "qualified charitable contributions" made by individuals and corporations. A "qualified charitable contribution" for this purpose is defined as a contribution meeting the following requirements:
- Paid in cash in the year 2020;
- Paid to public charities, governmental units (but only if contribution is made solely for public purposes), private operating foundations, private non-operating foundations (but only if the foundations are generally distributing all contributions received from the prior taxable year in the current taxable year) and certain agricultural research organizations under Section[1] 170(b)(1)(A));
- Not paid to a donor advised fund or a "supporting organization" under Section 509(a)(3); and
- The taxpayer makes an election to apply this provision. If the charitable contribution is made at the entity level of an S corporation or a partnership (including multi-member LLCs taxed as partnerships), the election must be made at the individual shareholder/partner/member level.
The taxpayer is not required to prove that the contribution supports a charitable organization that is providing assistance relating to the Coronavirus. However, a taxpayer should be careful when making donations to non-operating private foundations and governmental units, as the those donations may not constitute a "qualified charitable contribution." Also, as noted above, this applies solely to contributions made in the year 2020.
Individuals
The tax law generally provides that income tax deductions for contributions made by individuals to the charitable organizations described above (and certain other charitable organizations) is limited to 60% of the taxpayer's contribution base (generally, adjusted gross income) for the years 2018 – 2025.
Under the CARES Act, this 60% limitation does not apply with respect to qualifying charitable contributions. This 60% limitation was temporarily replaced with a 100% limitation. Individuals can claim income tax deductions for qualified charitable contributions up to their entire contribution base, less the amount of any non-qualified charitable contributions made in the same year (such as contributions previously made to a donor advised fund). However, any qualified charitable contributions made that exceeds this limitation can be carried over to the 5 succeeding taxable years in accordance with existing provisions of the Internal Revenue Code.
The CARES Act also introduced as a permanent change to the tax law that individuals who do not itemize deductions (that is, use the standard deduction) can claim an "above the line" deduction to reduce adjusted gross income in the amount of qualified charitable contributions up to a maximum of $300. A qualified charitable contribution for this purpose is one that meets the requirements set forth above, except that, it applies to contributions made in 2020 and in future years, does not apply to contributions treated as a carryover from a prior year, and no special election is required.
Corporations
Similar to individuals, corporations also may benefit from increased limitations on income tax deductions for qualified charitable contributions.
The tax law generally provides that income tax deductions for contributions to charitable organizations is limited to 10% of the corporation's taxable income. Under the CARES Act, this is now a 25% limitation. Corporations can claim income tax deductions for qualified charitable contributions up to 25% of their taxable income, less the amount of any non-qualified charitable contributions made in the same year. Further, any qualified charitable contributions made that exceed this limitation can be carried over to the 5 succeeding taxable years in accordance with existing provisions of the Internal Revenue Code.
Food Inventory Contributions
The tax law provides special rules for contributions of "wholesome" food from the inventory of a taxpayer, and provides a limit on the income tax deduction for this type of contribution in the amount of 15% of taxable income (in the case of a corporation) and 15% aggregate net income for a taxable year as further defined by the tax law (in the case of taxpayers other than corporations). Under the CARES Act, these limitations are increased to 25% for food contributions made in 2020, and the carryover provisions referenced above also apply.
Summary
The CARES Act increases incentives to taxpayers to make or increase their charitable contributions. However, as described above, certain requirements must be satisfied to benefit under the CARES Act, and the more significant benefits are only available to contributions made in 2020.
[1] All section references are to the United States Internal Revenue Code of 1986, as amended, unless otherwise indicated.
Fowler White's Tax Group provides sophisticated counsel to a diverse range of clients, representing high net worth individuals in domestic and cross-border tax and estate planning, public charities and private foundations, closely held businesses and start-up ventures, and individuals and businesses in tax controversies. For more information, please contact any member of our Charitable Planning and Tax-Exempt Organizations Team.
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