The CARES Act was passed on March 27th, 2020 due to the coronavirus pandemic. The intent was to create relief to US citizens in several ways, including incentivizing charitable contributions during 2020.
Before the pandemic, the 2018 tax reform limited charitable giving significantly – reducing the appeal for many people and causing a lot of strain on nonprofits. To give you some background, here is generally how it worked:
All taxpayers either take itemized OR standard deductions on their tax returns to reduce their income. The default is the standard deduction if you do not have enough expenses to itemize.
What deductions can you itemize?
- Mortgage interest
- Property/state taxes (limited to $10k)
- Qualified charitable contributions
How much itemized expenses are needed to exceed the standard deduction? Depending on your filing status the answer is as follows:
SINGLE OR MARRIED FILING SEPARATELY $12,200
HEAD OF HOUSEHOLD $18,350
MARRIED FILING JOINTLY $24,400
So, you would need AT LEAST the above amount (in your filing status) in deductions to be able to itemize.
Okay but what does this have to do with charity?
Well, if you do not itemize – then you do not get to deduct charity at all. The entire donation has no benefit to you because you default to the standard deduction (which you automatically get).
What?! How many people itemize in the country?
They estimate about only 13.7% of taxpayers itemized for 2019. So only 13.7% of the country get tax benefits from donating to charity.
So what has changed under The CARES Act?
Now that you understand where we were in 2019 and that only 13.7% of taxpayers benefit from charitable giving – the CARES Act made the following incentives:
All standard deduction taxpayers can deduct up to $300 to a qualified charity starting in 2020.
This means that everyone, regardless of income level, will be able to reduce their taxable income by up to $300 in addition to their standard deductions. While this may seem like a small amount, these contributions can make all the difference for our local nonprofits that are facing difficult times right now.
The other good news about this section of the bill, is that it does not YET have an end date. This could be a charitable benefit for years to come!
Requirements for this contribution:
- Must be done in cash (goodwill runs will not count)
- Have a receipt
- Be to a qualified charitable organization (not sure? Check here.)
The $300 you give could save you 20-40% in taxes depending on your bracket (approximately $60-$120), AND it still puts the full $300 into the organizations that are helping our community. That $300 could provide a night of care (food, shower clothes and safe night’s rest) for 25 people in need! And you will still be able to save $60-$120 in taxes. It’s a win-win!
Reduction of limitation on charitable donations in 2020!
In 2019, all taxpayers could only donate up to 60% of their adjusted gross income.
Huh? For example, if this taxpayer itemized and their adjusted gross income was $100k. They could only deduct up to $60k in charitable donations for 2019.
In 2020 – someone can donate up to 100% of their adjusted gross income. In the above example, someone could donate all $100k and still benefit.
This section does specify that its only for the 2020 tax year, it will likely not continue to be in place in 2021.
This is aimed towards taxpayers who donate significant amounts to charity annually and itemize their deductions.
CPA Tax Tips:
There are a lot of potential opportunities for tax planning here if you are a big giver. Before doing anything, discuss with a professional!
- Timing – You could time these significant donations along with large taxable transactions (sale of properties, gifting, sale of certain appreciated stock) with low risk of running into a limit.
- High wealth individuals – who typically give large sums, may have been limited if their investments took a dip in 2020. This increased limitation helps with that.
- Donating for several years at once – if you have significant donations but lower annual incomes, this could be a good opportunity to “bunch” your donations together when you would normally be limited.
- If you have large amounts of appreciated stock – it is one of the most tax advantageous ways to donate (this is nothing new). Although – considering the state of things this may not be the best time to sell stock! Talk to your advisor.
C corporations have more than doubled their ability to donate!
In the past, C corporations are only able to deduct up to 10% of their net income. This means, that if the company made $100k they are limited to only being able to deduct 10k of charitable donations.
Now, they can deduct up to 25%! So, these companies have more than doubled their capacity in taxable giving, which will help so many nonprofits all over the country.
Food and Beverage businesses get an enhanced tax deduction when donating food
When donating food from a food and beverage business to a charitable organization, the CARES Act increased tax benefits for this.
- Any business can donate food inventory up to 25% (previously 10%) of their net income to a qualified charity. The charity is must serve the needy, ill or infants. In this case, Portland Rescue Mission would qualify.
- The amount they claim is up to 2x the cost or 1x the cost + 50% of profit (compared to only cost before)
Example: Business donates a bottle of sauce. It costs $2 to produce, sell for $5, profit of $3.
Old method – you get to write off just the cost of $2 when donated.
Enhanced deduction – you get to write off $2 + 50% of $3 profit = $3.5 – this is almost double the write off!
CPA Tips for food and beverage business:
Donate surplus or near expiration inventory to places like Portland Rescue Mission for an added write off.
If you are already planning to feed healthcare workers, partner with a qualified nonprofit to get the deduction.
These incentives can help us rebuild and/or strengthen our community around us. If you do not have the means to donate, share this information with others that may be able to.
Kelli Loo is a CPA and owner of the Curated CPA Method + Society based in Vancouver, WA. To see more of her blogs related to taxes and The CARES Act visit kelliloocpa.com/blog. To connect via IG visit @kelliloocpa
Disclaimer – Information not to be used as official guidance or advice on tax related issues. Always consult with your tax professional to see what is best for your situation.