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CARES Act Provides New Incentives for Charitable Contributions, 100% AGI Deduction

Charitable organizations and their donors may be able to benefit from certain provisions of the recently enacted CARES Act, signed on March 27, 2020.

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Charitable organizations and their donors may be able to benefit from certain provisions of the recently enacted CARES Act, signed on March 27, 2020.

Charitable organizations and their donors may be able to benefit from certain provisions of the recently enacted CARES Act, signed on March 27, 2020. Here, we will focus on two CARES Act sections that favorably affect charitable contributions. Historically, Congress has chosen to increase the Adjusted Gross Income (AGI) limitation on charitable contributions in response to some natural disasters, in turn providing incentive for contributions to public charities. The CARES Act, written in response to the current COVID-19 pandemic, has set forth similar incentives.

Above-The-Line Charitable Contribution Deduction

Section 2204 of the CARES Act allows for an above-the-line deduction of up to $300 of charitable contributions. In general, only those individuals who itemize deductions on their personal tax returns can benefit tax-wise from charitable deductions. While $300 is a modest amount, this provision of the CARES Act provides an incentive for those individuals who do not itemize to reduce their 2020 tax liability by making donations to qualifying charities.

This provision applies only to cash donations made in 2020 to organizations described in IRC §170(b)(1)(A), such as educational institutions, hospitals, churches, food banks, community foundations medical research organizations, and most other types of public charities. However, the $300 above-the-line deduction does not apply to contributions made to supporting organizations or donor advised funds.

Charitable Contribution Deduction up to 100% of AGI

Providing a much greater potential benefit for charitable organizations, Section 2205 of the CARES Act modifies the AGI limitation on charitable contributions, allowing individual donors to deduct qualified cash donations of up to 100% of their AGI. Prior to the CARES Act, donors seeking to deduct their charitable contributions would have been limited to just 60% of their AGI. This increased deduction is an excellent opportunity for donors to reduce their 2020 tax bill, while providing a great benefit to charitable organizations during this time.

Organizations may opt to encourage larger, more affluent donors to take advantage of this incentive as such individuals may have the means to donate 100% of their 2020 AGI. As an example, if the donor in question is wealthy, but their taxable income is low for 2020, a large charitable contribution could help an organization tremendously while completely eliminating the donor’s tax bill for the year.

In alignment with the aforementioned section of the Act, contributions to certain organizations are not eligible for the increased limit, such as those made to donor advised funds, supporting organizations and private foundations.

Contributions Made by Corporate Entities 

Note that the above sections of the CARES Act relate to those contributions made by individual taxpayers for deduction on their personal tax returns. In the case of a cash donation made by a corporation, the CARES Act allows for deduction of up to 25% of the corporation’s 2020 taxable income. This is a favorable increase from the pre-CARES Act limitation of 10% taxable income.

The CARES Act of 2020 set forth a number of complex provisions. Due to these provisions, charitable organizations have a great opportunity to encourage larger donations by ensuring donors are informed of the unique incentives to receive a deduction in the full amount of their AGI for the tax year 2020. Organizations will see a tremendous benefit from these provisions, and their donors will also reap the benefits with a larger than usual tax deduction for their charitable contributions.

 

COVID-19 Business Resources

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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