For individuals, businesses, and nonprofit organizations alike, the time to consider long-term plans for economic recovery is now. As the COVID-19 crisis continues, we want to encourage our clients to look ahead and to consider certain provisions in the CARES Act legislation that may help your bottom-line.
We want to take a closer look at some of the legislation surrounding charitable contributions. Times of crisis may reduce our ability to support charitable organizations. For individual taxpayers, the ability to itemize deductions has been limited since the Tax Cuts and Jobs Act legislation that increased the standard deduction amount. The conundrum is: times of crisis are when we call on charitable organizations the most.
Our focus here is on the CARES Act sections that incentivize charitable giving for individuals and corporations.
Qualified Charitable Contributions
Under the CARES Act, certain types of charitable contributions are considered to be Qualified Charitable Contributions (QCCs). QCCs include cash contributions, for which deductions are otherwise allowed, and that are made to certain charities that are publicly supported. Property (unless food contributions made to C Corporations) and appreciated securities are not QCCs for purposes of the additional benefits provided by the CARES Act. Furthermore, contributions made to a non-operating private foundation or a donor-advised fund are not considered to be QCCs.
Allowance of Partial Above the Line Deduction for Charitable Contributions
For taxable years beginning after December 31, 2019, eligible individuals who do not itemize their deductions may claim an “above-the-line” charitable deduction. This deduction, which can be no more than $300, applies to QCCs you make in 2020. It will allow you to deduct up to $300 of QCCs, in addition to the standard deduction you are otherwise entitled to. If you itemize deductions, this provision will not provide you with any additional benefit.
Modification of Limitations on Charitable Contributions During 2020
For taxable years beginning after December 31, 2019, the CARES Act modifies the limitation of 10% of taxable income for charitable contributions made by a C Corporation, increasing the limit to 25% of taxable income, and the charitable deduction for food contributions has increased from 15% to 25%.
The CARES Act also temporarily modifies the 60% of Adjusted Gross Income (AGI) limitation on deductions for QCCs made to public charities by individuals who itemize their deductions. The modification increases the deduction from 60% to 100% of your AGI for 2020, and your ability to carry over contributions that exceed the limit remains unchanged, with carry overs allowed at 60% of AGI for the 5 years that follow. This particular provision will be beneficial to those who make substantial charitable contributions.
Under the CARES Act, the QCC limitations will be applied to cash donations first, with limitations subsequently applied to any non-cash contributions and other categories.
If you have contribution carryovers from prior years into 2020, the contributions for 2020 are deducted first, and any carryover contributions will be subject to the standard order.
To take advantage of the limitation increase, you elect to do so when filing your 2020 return. Partnerships and S Corporations should note that this election is made on the partner or shareholder level.
Roth Conversion Opportunity
Converting a Traditional IRA to a Roth IRA generates taxable income in the year of the conversion. For those who have deductible losses or substantial QCCs in 2020, a Roth IRA conversion is another consideration. The conversion will increase your Adjusted Gross Income, which can, in turn, increase your charitable deduction. The unlimited charitable deduction could result in no federal income tax due on the conversion.
We are committed to keeping our clients and community up-to-date on pertinent legislative changes throughout the COVID-19 crisis. We will be publishing articles on numerous sections within the CARES Act in the coming weeks. We welcome you to contact us with questions on these provisions, or to take a look at our COVID-19 Financial Resource and Tax Center for additional information on related matters.
by Daniel Doiron, CPA