In early 2020, the economy saw a sharp decline as the coronavirus began to spread throughout the United States. Shortly thereafter, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted to aid the nation's economic recovery. In part, this bill set forth temporary changes to encourage charitable giving during this challenging period. A number of these changes were extended through 2021 by the Consolidated Appropriations Act (CAA).
This article details the charitable deduction changes introduced by the CARES Act and extended through 2021 by the CAA. The discussion will focus on the above-the-line charitable deduction for non-itemizers and the increased deduction limits for cash and food inventory gifts to charity.
Individuals may claim charitable income tax deductions for certain types of contributions made to qualifying charitable organizations. Charitable income tax deductions are subject to certain deduction limits, based on the donor's taxable income, the type of asset donated and the nature of the recipient organization. For donors to reap the tax benefits of charitable income tax deductions, donors must itemize their deductions. Otherwise, donors are usually limited to the standard deduction.
Under the Tax Cuts and Jobs Act (TCJA), effective in 2018, the standard deduction increased to almost double its prior value and eliminated some itemized deductions. Since the passage of the TCJA, only about 10% of taxpayers itemize their deductions.
Above-the-Line Charitable Deduction for Cash Gifts
The CARES Act introduced a $300 charitable deduction for cash gifts made by non-itemizers filing individually or jointly in 2020. This "above-the-line" charitable deduction enables the majority of taxpayers who take the standard deduction to also benefit from their charitable gifts of cash. The CAA extended the $300 deduction for individuals through 2021 and increased it to $600 for joint filers making cash gifts to charity.
For purposes of this limit, qualified organizations are those described by the IRS as Sec. 170(c) organizations, with a few exceptions. Examples of qualified organizations include churches, educational institutions, hospitals, publicly supported charities and private operating foundations. Cash contributions to supporting organizations, donor advised funds, charitable remainder trusts and certain types of private foundations do not qualify for the above-the-line charitable deduction. See IRS Publication 526 for more information on the types of organizations that may qualify.
Eligible contributions must be made by cash or check. Cash contributions do not include the value of volunteer services, securities, household items or other property. Contributions carried forward from prior years do not qualify for the above-the-line deduction.
Tom and Jane are married, file their taxes jointly and take the standard deduction. In 2020, Tom and Jane gave a total of $500 in cash to their favorite charity. Under the CARES Act, Tom and Jane can deduct up to $300 by using the above-the-line charitable deduction.
In 2021, Tom and Jane decide to double their impact on their favorite charity by donating $1,000 in cash. They will be able to deduct up to $600 of this contribution under the CAA's increased benefit for married couples filing jointly. They will not be able to carry forward the remaining charitable contribution amounts in either year.
In 2020 and 2021, Tom and Jane also contributed $1000 in cash to their donor advised fund (DAF). Their advisor informs them that DAF gifts cannot be counted toward the above-the-line deduction, although DAF gifts are eligible for an itemized deduction.
This above-the-line deduction available through 2021 allows taxpayers to deduct their modest cash gifts without needing to itemize their deductions. For those wishing to contribute larger amounts and willing to itemize deductions, expanded giving opportunities are available.
100% Charitable Deduction Limit for Cash Gifts
In most years, the charitable deduction limit for cash gifts is limited to 60% of a donor's adjusted gross income (AGI). Gifts in excess of the applicable deduction limits may be carried forward for up to five additional years. Under the TCJA, the deduction limit for cash gifts to qualifying organizations was increased from 50% of the donor's AGI to 60%. Under the CARES Act and CAA, individuals can elect to apply up to 100% of their AGI in 2020 and 2021.
To be deductible under this increased limit, qualified contributions must be made in cash or by check to a qualified charitable organization and the donor must elect to use the enhanced charitable deduction limit. Cash contributions to DAFs, supporting organizations and charitable trusts do not qualify for this increased individual deduction limit.
The election to use the increased individual limit is made on a contribution-by-contribution basis. The donor must make the election for each qualified contribution, otherwise the usual percentage will limit apply. The election must be made on the donor's IRS Form 1040 or IRS Form 1040-SR. It is important to note that any of the donor's other types of charitable deductions, such as those for gifts of appreciated property or to a DAF, will reduce the maximum amount allowed under this election.
Daniel is employed as an electrical engineer and expects an AGI of $150,000 this year. In 2021, he receives an inheritance of $1,000,000 in cash from his late aunt's estate. He contributes his entire salary to his favorite public charity to establish a summer camp program for children in need. Due to the increased individual limit, Daniel may deduct this gift in its entirety. Assuming Daniel's $150,000 AGI places him in the 24% income tax bracket, this gift may save up to $36,000 in income taxes.
25% Charitable Deduction Limit for Cash Gifts from Corporations
For Subchapter C corporations, the usual deduction limit for cash gifts is 10% of taxable income for donations made to public charities. For 2020 and 2021, corporate cash gifts are deductible up to 25% of taxable income. As with the increased individual limit, the corporation must elect to use the increased corporate charitable deduction limit on a contribution-by-contribution basis.
Three years ago, avid bakers Joseph and Ernest started Bagels, Inc., which is organized as a C corporation. The company has been wildly successful from the start. The company regularly contributes $50,000 in cash each year to support its local food bank. The goal has been to donate approximately 10% of the company's taxable income, which usually reflects the maximum deductible percentage for corporate charitable cash gifts.
This year, Joseph and Ernest have been thankful for a steady stream of business, but they have seen their community particularly impacted by business closures. Bagels, Inc. plans to take advantage of the increased corporate limit by making a generous cash gift to the local food bank of $100,000. Assuming the business' taxable income of $500,000 remains consistent for 2021, Bagels, Inc. could potentially donate up to $125,000 this year and deduct this amount in full.
Increased Deduction Limit for Certain Food Inventory Gifts
Certain donations of food inventory for the ill, needy and infants are eligible for enhanced deduction limits. For 2020 and 2021 contributions, the limit for this type of deduction is increased from 15% to 25%. For C corporations, this percentage limit is based on taxable income. For other entities or individuals, the limit is based on the aggregate net income for the trades or businesses from which the contributions were made. The organization receiving the food donation may not be a private nonoperating foundation.
The IRS worksheet "Donations of Food Inventory" provides guidance on calculating the food inventory charitable deduction. The donor must first determine the fair market value (FMV) of the donated food by identifying the price at which the food would normally be sold. The donor does not reduce the FMV because the donated food item did not sell or because the food was prepared specifically for donation and not resale.
Next, the donor must determine the basis of the donated food. If a business does not account for inventories and is not required to capitalize indirect costs, it may elect to treat the basis of the food as being 25% of its FMV.
If the basis of the donated food is the same as or exceeds the FMV, the donor may claim a charitable deduction for the FMV of the donated food. If the FMV exceeds the basis, then the worksheet will lead the donor through a series of calculations to arrive at the charitable deduction. The charitable deduction will be the lesser of twice the basis of the donated food or the basis of the food plus one-half of the expected profit if sold at FMV.
Tony's Market receives a new shipment of dairy products every other week. The company then donates the remainder of the previous shipment's unexpired dairy products to the local women and children's shelter, a public charity, to stock their food pantry. The shelter provides Tony's Market with written confirmation that the donated dairy products will not be sold or exchanged in any way for value and will only be used to support their purpose of feeding the needy. The donated products must comply with the requirements of the Federal Food, Drug, and Cosmetic Act in effect on the gift date and as applicable for the prior six months.
For its first contribution of 2021, Tony's Market donates 20 gallons of milk. The basis in each gallon of milk is $1 and the FMV is $4. The company's CPA advises that Tony's Market may potentially deduct up to $2 for each gallon donated. This deduction reflects the lesser of twice the basis of each gallon ($1 x 2 = $2) or the basis plus one-half of the expected profit ($1 + $1.50 = $2.50).
The CPA notes that since Tony's Market is organized as a C corporation, it can potentially deduct up to 25% of its taxable income through charitable contributions of food inventory.
The CARES Act and CAA have broadened opportunities for philanthropy in 2020 and 2021. For individuals, one of the simplest ways to give is to make a cash donation and take advantage of the above-the-line charitable deduction. For donors choosing to itemize their deductions, now is an opportune time to give generous cash gifts in an amount up to 100% of their AGI.
Corporations can also fulfill their charitable goals by taking advantage of the increased deduction limit of 25% for cash gifts. Finally, both individuals and businesses wishing to make immediate and tangible gifts may deduct up to 25% of their aggregate net income through qualifying food inventory gifts.