donation

Business charitable contribution rules have changed under the CARES Act

In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions. Here are two changes that affect businesses:

The limit on charitable deductions for corporations has increased. Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes). Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).

What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.

The deduction limit on food inventory has increased. At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities. In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy or infants.  

“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.

Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.

What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

CARES Act questions

Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals. Contact us if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.

© 2020

Tax Efficient Charitable Giving

by Joe Ben Combs, CPA

Tax Manager at Atchley & Associates, LLP

As we all know there are tax benefits associated with donating to charities, religious organizations, universities, etc. We have written in the past about the basics of charitable contributions but we thought it would be good to take it to the next level and share some of the more sophisticated ways we help our clients maximize the tax benefits of their charitable giving. We’ll start with the simplest ideas first.

  1. “Bunching” contributions. You may be familiar with the concept as it is often applied to property taxes. The idea is that if you accelerate next year’s giving into this year (bunching multiple years’ deductions into one year) you can get both deductions this year and then next year you can take the standard deduction that have otherwise been wasted. It’s something I personally have taken advantage of on multiple occasions but it certainly doesn’t make sense for everyone. There are a host of factors that may limit the benefits so it’s definitely worth a quick conversation with your CPA or financial advisor before pulling the trigger.
  2. Qualified charitable distributions. A QCD is a distribution directly from your IRA to a qualified charity. You will not get a deduction for the contribution but the distribution is also not included in your income, which usually yields a better result than if you were to take a taxable distribution and then deduct the charitable contribution. What’s even better is these distributions can be used to satisfy your annual required minimum distributions (RMDs). It is a highly tax efficient way to give to charity. However, there are two major limitations. First, you must be at least age 70 1/2 to make a QCD. Second, the maximum amount you can distribute as a QCD is $100,000 per year.
  3. Donation of appreciated stock. This is one of the most powerful and underutilized charitable giving strategies available. Let’s look at an example to illustrate. Assume you intend to donate $100,000 to a charity. You currently hold a stock that you purchased for $60,000 and now happens to be worth $100,000. You could sell the stock and donate the $100,000 to charity, creating a taxable gain of $40,000 (and a tax hit of $6,000 of tax, assuming a 15% capital gains tax rate). Or you could donate the stock directly to the charity. If you do this, the tax rules allow you to take the same $100,000 deduction as if you had donated cash but avoid recognizing the capital gain. One thing to keep in mind – this strategy cannot be used to avoid short term capital gains as the contributed property must be held for more than a year.
  4. Donor advised funds. A donor advised fund (DAF) essentially functions as a charitable giving account. You are allowed a tax deduction when you contribute to the fund. Once the funds are in the account they are legally no longer in your control but you are allowed to give instructions (technically grant recommendations) to the organization managing the account about how to distribute the funds. They will often even allow you to select how the funds are invested while they are in the account so they continue to grow. This is a great way to manage your charitable giving and can help to facilitate some of the strategies already mentioned. For example, if you want to bunch your contributions this year but you don’t know which charity you want to give to or you just don’t want to give it all right now, you can contribute to your DAF and decide later where and when to distribute the funds. Or let’s say you want to donate a piece of appreciated stock but the organization you want to donate to does not have the structure in place to receive stock donations. You can contribute the stock to your DAF, the DAF will sell the stock, and you can direct the cash proceeds be donated to the charity. DAFs are also a useful tool for those who want to contribute anonymously.
  5. Charitable trusts. There are a variety of trust arrangements that can be used – usually as estate planning tools – to accomplish your charitable goals. We won’t go into all the particulars here but these usually involve a noncharitable beneficiary receiving income for a certain period of time (generally his or her lifetime) and a charitable beneficiary receiving the remainder, or vice versa. Charitable trusts are a good option for those with substantial wealth looking to retain income for their lifetime, maintain control over charitable assets, or create a more flexible plan of disposition for their assets that includes charitable and noncharitable goals. Needless to say, consultation with your CPA and/or attorney is highly recommended before pursuing this option.
  6. Private foundation. For those with substantial wealth who are interested in creating an ongoing charitable operation, a private foundation may be the solution. While these can be expensive to create and maintain, they provide opportunities that none of the previous strategies do. For example, if you are interested in providing free tutoring to underprivileged children in an area that is not served by any other organization, you can create a foundation that does just that. You can claim a tax deduction for contributions to the foundation, maintain control of the operational aspects, and involve friends or family members in the leadership of the organization if desired. Of course there are numerous tax, legal, and administrative considerations to be discussed with your CPA and attorney before going down this road.