CARES Act Changes to Charitable Donations

by Joel Shabsin, CPA

One of the provisions in the CARES Act revolves around changes to the Tax Cuts and Jobs Act surrounding charitable donations. Because of the TCJA, fewer taxpayers are able to itemize and take advantage of donations they make to 501(c)(3) organizations.

The CARES Act created 4 tax breaks for charitable donations. First an individual can take an above the line deduction of up to $300 of qualified donations they make in 2020 whether or not they itemize deductions. The donation just has to be made to a 501(c)(3) non profit organization. It doesn’t have to be Covid-19 related but the same substantiation rules are in effect to prove the legitimacy of the deduction. The first $300 of donations will go toward this deduction, so anyone who itemizes will benefit from this above the line deduction before claiming any other donations on schedule A. In other words, a taxpayer who makes a total of $1000 of charitable deductions for 2020 will claim $300 as an adjustment to income and will be able to use the remaining $700 as an itemized deduction. It appears that if the taxpayer cannot itemize in 2020, they will be able to carry forward any excess for 5 years. There will be additional IRS guidance coming on this in the future.

The 2nd change in charitable deductions revolves around the limit allowed in the past. The TCJA raised the deductible limit for individuals from 50% of AGI to 60% of AGI. The CARES Act increased this limit to 100% of AGI for 2020. So, as a result of this change, for 2020 a taxpayer can write off the full amount of donations they make this year if they can itemize. Again, any excess over the 100% of AGI can be carried over for 5 years. The 3rd change is an increase in deduction limits for Corporations, previously capped at 10% of taxable income. The CARES Act allows a Corporation to take a charitable deduction of up to 25% of its taxable income in 2020 with any excess being carried over for up to 5 years. The 4th change applies to food donations. With many people unable to work and not getting a pay check, donations to food banks or other 501(c) (3) organizations that accept food donations are an important vehicle to keep people fed. Tax law already allowed Corporations to deduct the lesser of the cost of donated food plus half of the profit if the food were sold at fair market value or twice the cost of the donated food, limited to 15% of the Corporation’s taxable income. The CARES Act increased the allowable percentage to 25% of taxable income.

Many restaurant clients and other food related small businesses, when forced to close because of the pandemic, donated their unsold food products to charities. Those who did so will be able to take advantage of the increased limits provided by the CARES Act. Any excess value can be carried forward for 5 years like any other donation in excess of the income thresholds. If a client does take advantage of this deduction, they must reduce cost of goods sold by the original cost of the donated food and must have documentation to support their deduction. Finally, the CARES Act did nothing to change the tax laws concerning Qualified Charitable Distributions. Taxpayers can still take advantage of an above the line deduction for a QCD from a retirement plan Required Minimum Distribution by instructing the plan sponsor/custodian to make direct payments to qualified 501(c )(3) organizations.

Caution: This information is for tax professionals only. It is not intended as specific advice for taxpayers.