Article by Magdalena Czerniawski and Marks Paneth
The CARES Act includes many provisions that affect nonprofits. Aside from Payroll Protection Program loans, the first provision affecting nonprofits is the above-the-line deduction of $300 available for certain contributions to charities. Although the deduction amount is only $300, it can be taken by any individual filing a tax return even if they take the standard deduction. The Tax Cuts and Jobs Act of 2019 (TCJA) increased the standard deduction to $12,400 for single taxpayers and $24,800 for married taxpayers filing jointly. With the cap on state and local taxes at $10,000, most individuals defaulted to the standard deduction when filing their tax returns under the new law, leading to a drop in their donations. The biggest drop was in the small $100-$250 level.
This temporary change in the law provides opportunities for donors to contribute and receive a tax benefit. The deduction is allowed, provided it is given to a public charity but not a supporting organization, a private foundation or a Donor Advised Fund (DAF). This makes sense because giving to any organization other than a public charity would delay the actual impact. For instance, DAFs do not require the immediate distribution of the monies to charity, and private foundations must only distribute 5% of the average fair market value of their non-charitable assets to public charities.
In addition, the CARES Act changed the deduction limit previously imposed by TCJA. Individuals who itemize their deductions can take an increased charitable contribution deduction up to 100% of their Adjusted Gross Income. If the contributions, which must be made in cash to qualified charities, are above the 100% level, they can be carried forward up to five years. Those individuals cannot take advantage of the $300 above-the-line deduction. This provision is attracting higher-level donors and saving them additional tax dollars. Individuals who want to take advantage of this must make an election to receive this benefit. The contributions also must be made to public charities excluding supporting organizations, and not to private foundations or DAFs.
Contributions made by a partnership or an S-Corporation will be passed on to its partners who then will be subject to the individual rules. The above-mentioned election needs to be made at the partner/shareholder level.
Lastly, the CARES Act provided additional charitable deduction incentives for C-Corporations in the form of an increased deduction limit. The prior law allowed the deduction of cash contributions to charitable organizations up to 10% of taxable income. The Act increases that deduction amount up to 25%, with an excess allowed to be carried forward for up to five years. In addition, the deduction of food inventory to a qualified charity is increased from 15% to 25%. Again, all of these contributions must be made in cash, with the exception of food inventories, and to public charities, again excluding supporting organizations, private foundations and DAFs.
About the Author
Magdalena M. Czerniawski, CPA, MBA, is a Partner at Marks Paneth LLP and a member of the firm’s Nonprofit, Government & Healthcare Group. With over 15 years of nonprofit industry experience, she provides tax services to a wide array of nonprofits, including charitable organizations, schools, social welfare organizations, professional associations and private foundations.
Marks Paneth LLP is a premier accounting firm with origins dating back to 1907. With a team of nearly 700 professionals, the firm provides a full range of audit, accounting, tax and consulting services, with specialties in international tax, forensic accounting, litigation support, technology services, family office and financial advisory services.