The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted in December, 2020, contained several provisions that expand tax benefits for individuals and businesses who give to charity. However, the changes are only temporary; specifically, you have only until the end of 2021 to take advantage of them, so you will need to act quickly if you wish to do so.
The new law extends through the end of 2021 these four temporary tax changes originally enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act:
• Non-itemizer deduction up to $600
Ordinarily, individuals who elect to take the standard deduction cannot claim a deduction for their charitable contributions. The law now permits you to claim a limited deduction on your personal 2021 federal income tax returns for cash contributions made to qualifying organizations.
Nearly nine out of ten taxpayers now take the standard deduction, and could potentially qualify to claim this limited deduction. These individuals can claim a deduction of up to $300 each for 2021 cash contributions made to qualifying charities.
Cash contributions to most charitable organizations qualify. However, contributions made either to supporting organizations or to a donor advised fund do not qualify. Further, contributions carried forward from prior years do not qualify, nor do contributions to most private foundations and most charitable remainder trusts.
In general, a donor-advised fund is a fund or account maintained by a charity in which a donor can, because of being a donor, advise the fund on how to distribute or invest amounts contributed by the donor and held in the fund. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations.
Cash contributions include those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with the individual’s volunteer services to a qualifying charitable organization. They don’t include the value of volunteer services, securities, household items or other property.
• 100 percent limit on eligible cash contributions for itemizers
Subject to certain limits, if you personally itemize your deductions, you may generally claim a deduction for charitable contributions made to qualifying organizations. These limits typically range from 20 percent to 60 percent of adjusted gross income (AGI), and vary by the type of contribution and type of charitable organization.
For example, a cash contribution made by an individual to a qualifying public charity is generally limited to 60 percent of the individual’s AGI. Fortunately, excess contributions may be carried forward for up to five tax years.
The new law permits electing individuals to apply an increased limit, up to 100 percent of their AGI, for qualified contributions made during calendar year 2021. Qualified contributions are contributions made in cash to qualifying organizations.
As with the new limited deduction for nonitemizers, cash contributions to most charitable organizations qualify, but contributions made either to supporting organizations or to establish or maintain a donor advised fund, do not. Nor do contributions to private foundations and most contributions to charitable remainder trusts
There is a catch so to speak, that being you have to make an election on your 2021 personal tax return to use the higher limit. Unless you make the election for any given qualified cash contribution, the usual percentage limit will apply.
• Corporate limit increased to 25 percent of taxable income
The law now permits C corporations to apply an increased limit of 25 percent of taxable income for charitable contributions of cash they make to eligible charities during 2021. Normally, the maximum allowable deduction is limited to 10 percent of a corporation’s taxable income.
As with personal contributions, the increased corporate limit does not automatically apply, but must be elected on a contribution-by-contribution basis on the C corporation’s return.
• Increased limits on deductions by businesses for donated food inventory
Businesses donating food inventory that are eligible for the existing enhanced deduction (i.e., for contributions for the care of the ill, needy and infants) may qualify for increased deduction limits. For contributions made in 2021, the limit for these contribution deductions is increased from 15 percent to 25%.
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 are made.
A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.
• Keep good records
As always, special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining a receipt from the charity BEFORE filing a return, and retaining a cancelled check or credit card receipt for contributions of cash.
For donations of property, additional recordkeeping applies, and may include filing a Form 8283 and obtaining a qualified appraisal in some instances.
Publication 526, Charitable Contributions, which is available on IRS.gov, is a good resource to learn more about qualifying charitable contributions, applicable limits and requirements. But again, act fast to take advantage of these enhanced tax benefits. Time is running out!
Lane Keeter, CPA, is Office Managing Partner of the Heber Springs office of EGP, PLLC, CPAs & Consultants (a full-service financial firm with offices in Heber Springs, North Little Rock and Bryant) and past winner of The Sun-Times Reader’s Choice Award for Best Accountant