The COVID-19 pandemic has had a tremendous impact on the world and our nation, and nonprofits are no exception. On March 27, 2020, The Coronavirus Aid, Relief and Economic Security (CARES) Act, which includes a $2+ trillion economic stimulus package, was enacted to provide needed support to U.S. individuals and organizations.
The CARES Act includes provisions that are designed to foster charitable giving activities, which will directly benefit nonprofits as they strive to advance their missions and continue their critical work in this unusual season. Yet, many taxpayers may still be unaware of the CARES Act’s charitable giving incentives.
Here, we highlight some important and beneficial features of this legislation specifically as it relates to corporate and individual giving so that nonprofits can provide their donors with valuable information during the time of the coronavirus.
How The CARES Act Impacts Individual Charitable Giving
Electing individuals who itemize deductions on their personal income tax return (including couples filing a joint return) can deduct qualified cash charitable donations limited to 100% of their adjusted gross income (AGI), beginning with donations made in 2020. Under previous law, such contributions were included in the 60% of AGI limit.
Qualified contributions are disregarded in applying the 60% limit on cash contributions of individuals, and rules on carryovers of excess contributions. Such contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of 100% of AGI, over the amount of all other charitable contributions allowed as a deduction for the contribution year.
In light of The CARES Act, taxpayers can eliminate their income subject to regular income tax with charitable donations. For example, a couple with $100,000 in AGI may donate $100,000 to a qualified nonprofit and eliminate their regular income tax bill for 2020. Taxpayers will want to work with their tax advisor to coordinate the added charitable deduction with other deductions and credits to achieve maximum benefit. Previously, the charitable deduction for a couple with $100,000 in AGI would have been limited to $60,000, so the same couple would have paid tax (reduced by tax credits) on the taxable income remaining after other deductions. Qualified contributions in excess of the deduction limit can be carried forward to future years.
This is a significant increase and potential tax planning idea for certain people. Cash donations qualify for the new 100% limit, if paid to public charities and certain other charitable organizations, other than 509(a)(3) supporting organizations or donor advised funds.
Also, for 2020, individuals who do not itemize deductions can deduct up to $300 per taxpayer in annual cash charitable contributions as an above-the-line deduction. This deduction is allowed in addition to the standard deduction allowable to those taxpayers.
For example, if a married couple has $100,000 in income and takes the standard deduction, the couple can reduce adjusted gross income to $99,700 with a $300 contribution. To qualify for this deduction, the gift must be made in cash and directly to a qualified charity. Donations made to a donor-advised fund or private foundation do not qualify.
How The CARES Act Impacts Corporate Charitable Giving
Also, in light of The CARES Act, corporations may increase their limit on charitable deductions up to 25% of their taxable income with a qualified contribution to a charitable organization (see above).
Previously, the charitable deduction limit for regular corporations was 10% of taxable income. Remarkably, a corporation that has $1 million of taxable income may reduce this by $250,000 with a gift or gifts to a qualified charity. This can be an opportunity for businesses to increase their impact on the communities they serve by increasing their corporate giving in this critical time.
Connect with an Advisor
Nonprofits are navigating many challenges as a result of the COVID-19 pandemic. To discuss your organization’s specific situation and needs, connect with a Warren Averett advisor who can help.
This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.