The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes four changes to the rules for charitable income tax deductions:
1. $300 Above-the-Line Charitable Income Deduction (Section 2204 of the CARES Act)
Individual taxpayers who take the standard deduction are allowed an “above the line” charitable income tax deduction equal to the amount of charitable cash gifts, but only up to $300. Although not specifically addressed in the CARES Act, it is reasonable to assume that each spouse of a married couple should be allowed to each claim a separate $300 deduction (for a total of $600).
Eligibility only extends to those individuals who claim the standard deduction (and do not itemize). The deduction is limited to contributions of cash and does not include contributions to a supporting organization, a donor advised fund, or non-operating private foundations. It also does not include any carryovers of excess charitable contributions from previous years. This provision is a permanent change.
2. AGI Limitation for 2020 for Cash Gifts (Section 2205 of the CARES Act)
For contributions of cash paid to charitable organizations in calendar year 2020 (and 2020 only), individual taxpayers who itemize are allowed to elect to claim a charitable income tax deduction up to 100% of adjusted gross income (AGI), computed without any net operating loss carryback to the taxable year.
Taxpayers have to elect to use the provision. Taxpayers may opt to not make the election if otherwise the usual provisions would carry over the deduction into a future year where the value of the deduction may be larger because it can be claimed against income subject to higher tax rates. This provision also applies to charitable contributions made by partnerships and S-corporations where the charitable contribution is then allocated to individual taxpayers.
This provision does not apply to contributions to a supporting organization, a donor advised fund, or non-operating private foundations. Contributions in excess of a taxpayer’s AGI is carried over for five years (and will be subject to the current 60% AGI limitation on cash gifts in future years).
The CARES Act requires that this amount is “paid in cash during the calendar year 2020 to an organization.” It is unlikely that a donor who contributed cash to a charitable remainder trust could claim the higher AGI limit. It is arguable that a donor who contributes cash to an eligible charitable organization in exchange for a charitable gift annuity would be eligible for the 100% AGI limit, but this is unclear.
3. Increased AGI Limitation for Corporate Taxpayers (Section 2205)
For contributions of cash paid to charitable organizations in calendar year 2020 (and 2020 only), a corporation can claim a charitable income tax deduction up to 25% of the corporation’s taxable income. This provision does not apply to contributions to a supporting organization, a donor advised fund, or non-operating private foundations.
This provision applies to C-corporation taxpayers (corporations that pay their own income taxes). S-corporations that make charitable contributions allocate these deductions among their shareholders and the shareholders can claim a deduction on their own personal income taxes.
4. AGI Limitations for Contributions of Food Inventory
For contributions paid in calendar year 2020 (and 2020 only), the limitation on charitable income tax deductions for food contributions is increased to 25%:
- For business taxpayers, other than corporations, that make a contribution of food to a charitable organization is allowed to claim a charitable deduction up to 25% of the partner’s or shareholder’s AGI (for partnerships and S-corporations, the deduction is passed through to partners or shareholders).
- A corporate taxpayer that makes a contribution of food to a charitable organization is allowed to claim a charitable deduction up to 25% of taxable income.
As background, contributions of inventory property related to the donee organization’s exempt function and for the care of the ill, needy, or infants is not subject to the general rule that the contributor only receives a deduction for tangible personal property equal to basis. Taxpayers are generally permitted to take a charitable deduction for a donation of food inventory to a charitable organization. The deduction is limited to the lower of:
- 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;
- Twice the taxpayer’s basis.
New Provisions for Non-Itemizers
For tax years after 2017, the Tax Cut and Jobs Act of 2017 (Public Law No. 115-97) substantially increased the standard deduction for both individual and married taxpayers (and also limited some itemized deductions). This meant that many taxpayers who previously itemized now find it more advantageous to claim a standard deduction and, because of this, had no marginal tax incentive to make charitable contributions. Charitable organizations have been concerned that the change, which eliminates the tax incentive to make a charitable gift for many individuals, will lead to a decrease in the amount of charitable contributions.
The new provision is a first step to addressing this. As noted above, for taxable years beginning 2020, a taxpayer who takes advantage of the standard deduction may take an above the line charitable deduction of up to $300 ($600 for a married couple). The “above-the-line” deduction means that it can be deducted from income even if the taxpayer claims the standard deduction. Charitable organizations are hoping that the $300 limitation will increase or be eliminated in the future.
Limitations on the Charitable Deduction for Taxpayers who Itemize
A taxpayer’s charitable deduction is subject to an overall limitation based on the taxpayer’s adjusted gross income. This limitation depends on whether the recipient organization is a public charity or a private foundation and the type of property contributed. To the extent a taxpayer has a charitable deduction in excess of the applicable AGI limitation, the amount can be carried forward for five years.
Below please find a chart with a summary of the AGI limitation. The AGI limitation rules can be difficult to apply:
- The 50% AGI limit on contributions to public charities coordinates with the 30% AGI limit on contributions to private foundations so that the 50% AGI limit and the 30% AGI limit applicable to private foundations can be “stacked.” That is, an individual can make a gift of cash equal to 30% of AGI to a private foundation and make a gift of cash equal to 20% of AGI to a public charity and claim a total charitable deduction equal to 50% of AGI.
- The 50% AGI limit on contributions to public charities also coordinates with the 30% AGI limitation on gifts of long-term capital gain property so that the deductions can be stacked: An individual can make a gift of cash equal to 20% of AGI to public charities and also make a gift of appreciated securities equal to 30% of AGI to public charities and claim a charitable deduction equal to 50% of AGI.
- However, the 60% AGI limit for cash contributions to public charities is applied separately. Any contribution of cash is subject to the 60% AGI limit, but the 50% and 30% AGI limits apply separately. In other words, if an individual makes a cash contribution to a public charity and non-cash contributions to public charities or contributions to private foundations, the 60% AGI limit only applies to the extent the cash contribution to public charities exceeds 50% of AGI (otherwise, the total charitable deduction will be subject to the 50% AGI limit).
- Unlike the 60% AGI limit, the 100% AGI limit for cash gifts (applicable only to 2020) can be stacked with the other limits. This means if a donor contributes appreciated long term capital gain property of 30% of AGI, the donor can still make a cash gift to public charities of 70% in 2020 and receive a full 100% AGI deduction.
The chart below shows the AGI limitations for 2020.
|Public Charity, Supporting Organization, & Private Operating Foundation
|Type of Property
|Deduction Limitation as a Percentage of AGI
|Deduction Limitation as a Percentage of AGI
|Amount of Cash
|100% if to a public charity other than a supporting organization or DAF*
|Amount of Cash
|60% if to a supporting organization or a Donor-Advised Fund*
|Ordinary Income Property
|Short-Term Capital Gain Property
|Long-Term Capital Gain Property (other than tangible personal property)
|Qualified Appreciated Stock: FMV
|Long-Term Capital Gain Property / Tangible Personal Property – Property is Related Use
|All other LTCG Property: Cost Basis
|Long-Term Capital Gain Property / Tangible Personal Property – Unrelated Use
*See discussion above.
**Taxpayers may elect to claim a deduction equal to cost basis in exchange for using the 50% limitation.
For a summary of tax provisions in the CARES Act, click here.
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