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Individuals, Businesses Receive More Incentives to Make Charitable Donations in 2020 by Jack Winter, CPA

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Posted on June 02, 2020 by Jack Winter

The financial impact of the COVID-19 health crisis will leave a lasting impression on individuals and businesses throughout the world. For nonprofit organizations that rely on public donations to fund research and services for those in need, the pandemic can be devastating. In response, the CARES Act offers U.S. individuals and businesses greater incentives to reach into their pockets and increase their philanthropic giving during this year of great uncertainty.

For Individuals

The CARES Act modifies existing law, which restricts the charitable tax deduction to only those taxpayers who itemize their deductible expenses and further limits the amount of the deduction to no more than 60 percent of the taxpayer’s adjustable gross income (AGI).

Effective for the 2020 tax year, individuals who claim the standard deduction may deduct from their taxable income up to $300 in cash contributions they make to qualifying nonprofits during the year. Moreover, the CARES Act temporarily repeals the limit on the deductibility of cash contributions, allowing taxpayers who itemize deductions to deduct charitable cash donations of up to 100 percent of their AGI. In other words, if you choose to donate all your AGI to charity in 2020, you will not pay tax on any of that income. Ordinarily, the deduction for cash contributions made by taxpayers who itemize is limited to 60 percent of AGI.

One important caveat to remember is that the increased limits for cash donations apply only to publicly funded charities and certain foundations. They do not apply to any contributions made to private foundations or donor-advised funds.

For Businesses

For charity-minded C corporations, the CARES Act also increases the deduction for cash contributions in 2020 from 10 percent to 25 percent of a corporation’s taxable income. Entities structured as S corporations, partnerships, LLC and sole proprietorships, whose business income passes through to their owners, must apply the charitable deduction rules for individuals. Taxpayers who itemize may deduct 100 percent of their qualifying charitable donations of cash, whereas those taxpayers claiming the standard deduction may write off up to $300 of cash contributions on their personal income tax returns.

Businesses, such as grocers or restaurants, that produce, distribute, and/or sell food, may donate some of their “apparently wholesome” food inventory to a nonprofit this year and receive a charitable deduction of as much as 25 percent of their taxable income.

For Retirees

 The CARES Act suspends for 2020 the rule that individuals age 70½ and older must take annual required minimum distributions (RMD)s from their retirement accounts, including IRAs, 401(k)s, 403(b)s and government 457(b) plans. This is good news when considering that RMDs generally are treated as taxable income.  However, the one thing that the CARES Act does not change is the ability of individuals age 70½ or older to transfer up to $100,000 from their retirement accounts directly to qualifying nonprofits and avoid paying income tax on those amounts. While these qualified charitable contributions (QCDs) may not offset RMDs in 2020, they can provide individuals with a tax-efficient way to reduce taxable retirement account balances while supporting charities in need.

These expanded charitable deductions available in 2020 under the CARES Act apply only to taxpayers’ calculation of federal income tax. Individuals and businesses should meet with their tax advisors to implement strategies that maximize their federal, state and local tax efficiency while achieving their individual philanthropic goals.

About the Author: Jack Winter, CPA/PFS, CFP, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides estate planning, tax structuring and business advisory services to individuals, families and business owners. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.