The IRS has highlighted four temporary tax changes which are a part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). These tax changes have been designed to help individuals and businesses who give to charity before the end of this year.
Individuals who don’t itemize
Individuals who elect to take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. Under this change, these individuals can claim an "above-the-line" deduction of up to $300 for cash contributions made to qualifying charities during 2020. The maximum above-the-line deduction is $150 for married individuals filing separate returns.
Individuals who itemize
Subject to certain limits, individuals who itemize may claim a deduction for charitable contributions they make to qualifying charitable organizations. These limits generally range from 20-percent to 60-percent of an individual’s adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. The CARES Act permits electing individuals to apply an increased limit, up to 100-percent of their AGI, for qualified contributions (Increased Individual Limit). The election is made on a contribution-by-contribution basis. Qualified contributions are limited to those made in cash during calendar year 2020 to qualifying charitable organizations. Individuals who would like to take advantage of the Increased Individual Limit must make their elections with their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors.
Increased Corporate Limit for charitable contributions
The CARES Act has permitted C Corporations to apply an increased limit of 25-percent of taxable income (Increased Corporate Limit) for charitable contributions of cash they make to eligible charities during the 2020 calendar year. The maximum allowable deduction is usually limited to 10-percent of a corporation’s taxable income. C Corporations must elect application of the Increased Corporate Limit on a contribution-by-contribution basis.
Businesses donating food inventory
Businesses donating food inventory that is eligible for the enhanced deduction (for contributions for the care of the ill, needy, and infants) are eligible for increased deduction limits. For contributions made in 2020, the limit for these contribution deductions is increased from 15-percent to 25-percent. For C Corporations, the 25-percent limit is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their aggregate net income for the year from all trades or businesses from which the contributions were made. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.
In addition, the IRS has reminded both individuals and businesses that special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. For donations of property, additional recordkeeping rules may apply, including filing a Form 8283, Noncash Charitable Contributions, and obtaining a qualified appraisal. The Service has requested taxpayers to see Publication 526, Charitable Contributions, for additional details on how to apply the percentage limits described above and a description of the recordkeeping rules for substantiating gifts to charity.
Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.
For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC
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