COVID-19 and Charitable Contributions by Individuals and Businesses
Stay at home orders and forced closures have caused many U.S. businesses and individuals to seek financial help. The federal government responded in March by offering Economic Impact Payments, tax credits, extended deadlines, and enacting the Paycheck Protection Program (PPP). This inspired many businesses and individuals to offer assistance as well.
Through charitable contributions, individuals and businesses have helped numerous organizations and people throughout the pandemic. As the year comes to a close, it’s important that taxpayers understand the new tax rules for 2020. Many charitable donations are tax deductible this year. Designed to incentivize charitable giving, these important changes made in light of COVID-19 allow business owners and individuals to reduce their taxable income.
Changes to Charitable Contributions Deductions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March, 2020, changed the rules for cash contributions made to public charities. In previous years, individuals had to itemize their deductions in order to deduct charitable contributions. The new rule allows taxpayers that do not itemize their deductions in 2020 to take a charitable deduction of up to $300 for cash contributions made to qualifying organizations.
Qualifying organizations include those with a religious, charitable, educational, scientific, or literary purpose. Contributions made to qualifying organizations do not need to be related to COVID-19 to qualify for the deduction. In addition to deductions for individuals, C corporations can deduct charitable contributions made in 2020 up to 25% of their taxable income.
Individuals that itemize their deductions can deduct cash deductions from 100% of their gross adjusted income. This is different than the previous limit of 60%. However, it’s important to note that the higher limit does not apply to donations made to private foundations or donor advised funds.
The carry forward rule has not changed. Any contributions made by individuals and C corporations that exceed the tax law limitations can be carried forward for up to five years.
Another change, restaurant owners can deduct donations of food inventory up to 25% of the net income from the business. This has increased from last year’s 15% limit. This rule only applies to donations of “apparently wholesome food” and all donated food inventory must meet the government’s quality and labeling standards.
Beware of Scams
As the government incentivizes charitable giving, it’s important that individuals and businesses take care to avoid possible scams. Scammers have gotten extremely crafty in recent months with many attempting to trick people into giving out their personal or financial information. Before making a charitable donation, individuals are strongly advised to check the validity of the organization through the IRS tax-exempt organization search tool.
Tax Planning and Preparation for Individuals and Businesses
Navigating changing tax laws often creates confusion for individuals and businesses. Speaking with an experienced tax consultant can help determine tax liability and appropriate deductions. TMDL offers individual tax planning and preparation, corporate tax planning and preparation, and IRS representation. Please contact us to learn more about deducting charitable contributions because WE KNOW HOW!