Every person who donated cash, canned goods, community care food boxes or frozen turkeys received a … [+]
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It is charitable season! Statistics show that around 30% of all annual giving is done in December. The charitable surge as we head into year end might be even higher this year because of additional needs many communities are facing because of COVID-19.
By now, most donors are likely aware that the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes incentives to increase charitable giving in 2020. What they may not know, however, is the range of incentives for giving or the different ways in which they may claim some of those incentives. They also may not realize that these incentives expire at the end of 2020.
This article explores the charitable incentives available under the CARES Act in 2020, the various ways that donors can claim some of them and the tax-planning considerations one of them may raise.
CARES Act Incentives
Three provisions in the CARES Act incentivize charitable giving. First, the CARES Act permits eligible individuals who do not itemize deductions to deduct $300 of qualified charitable contributions as an “above-the-line” deduction for tax years beginning in 2020. As an FYI, the footnote 76 of CARES Act and the new IRS 1040 instructions seemed to limit the deduction for married couples to $300. Considering nearly 9 out of 10 filers don’t itemize, this incentive offers the benefit of a charitable deduction to the vast majority of taxpayers.
Coronavirus Aid, Relief, and Economic Security CARES Act on the desk.
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Second, individuals who itemize deductions may now deduct 100%, rather than 60% of their adjusted gross income for 2020. This means that an individual who earns $100,000 could donate his entire income, claim a $100,000 charitable deduction, and have no taxable income in 2020.
Third, the CARES Act increases deductions for contributions of food or inventory from 15% to 25% of a taxpayer’s adjusted gross income. This is especially significant for businesses that have pivoted from providing employee meals or storing excess inventory.
The other rules associated with charitable contributions of food remain the same. The donation must relate to the charity’s exempt function and be for the care of the ill, needy, or infants. The deduction is limited to the lower of (i) the taxpayer’s basis in the property plus one-half of the gain the taxpayer would have realized on the sale of such inventory or; (ii) twice the taxpayer’s basis.
Guardrails
To avoid abuse, the CARES Act includes guardrails. First, the increased limits apply to only cash donations in US dollars, not to securities or bitcoin. Second, only gifts to certain public charities and certain foundations are eligible. For example, gifts to donor-advised funds are eligible only for the standard 60% deduction, not the 100% deduction.
The 100% deduction also does not apply to carryovers of charitable contributions from tax years before 2020, which continue to be subject to the prior limits.
Private foundations
Conduit Foundations
Under the CARES Act, gifts to a private foundation do not qualify for the 100% deduction unless the foundation has elected to be a conduit foundation for those contributions. A foundation qualifies as a conduit foundation under Section 170(b)(1)(F)(ii) if it makes, by March 15th (the fifteenth day of the third month after the end of the tax year), qualifying distributions out of corpus equal to 100% of the value of the contributions received in 2020.
Various income tax forms for not for profits and private foundations showing the escape key on a … [+]
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To be considered qualifying distributions, distributions must be made to an organized charity that is not controlled directly or indirectly by the foundation or another private foundation. For the contributions to qualify as “out of corpus,” the foundation must distribute the annual required amount of minimum-investment return under Section 4942 and 100% of the contributions received in the current tax year.
Assuming the requirements for conduit foundations are met, donating through a private foundation gives donors a 100% charitable deduction in 2020, while also giving the foundation some time into 2021 to distribute the funds to qualifying charities. Given that need will continue well into 2021, having additional time could allow foundations to better target their giving in 2021. For the charities, receiving donations from private foundations lessens the risks to tax-exempt status that can come from accidentally receiving too much from any one donor.
Tax-planning considerations
The introduction of a 100% deduction for charitable contributions under the CARES Act raises an interesting ordering question. Let’s assume, for example, an individual had a net operating loss (NOL) of $1 million in 2019 from a business and carried the NOL forward into 2020. In 2020, the business makes $1 million. If the taxpayer donates $1 million in cash to a qualifying charity in 2020, which deduction comes first, the $1 million NOL or the $1 million unlimited donation?
Because 2020 is not a loss-generating year in our example, Section 170(d)(1)(B) dictates that the charitable deduction gets deducted against adjusted gross income before the carryover NOL. With no 2020 income left after the charitable deduction, the taxpayer can use the NOL in 2021 or later.
Takeaways
The CARES Act increased incentives for charitable giving in response to the crisis created by COVID-19. These benefits, however, are only available for tax year 2020. As we approach the expiration of those incentives, understanding the options becomes more and more important for charitable giving.