The coronavirus pandemic has brought out the best in many small business owners despite their own financial hardships. Many have generously given to help others in their communities and beyond. They’ve supported causes with cash and other types of donations.
Are Charitable Contributions Tax Deductible?
The tax law rewards the giving mentioned above with write-offs. And the CARES Act enhances deduction opportunities.
If you or your business have given money to public charities, you can take increased deductions as a result of tax law changes. The donations don’t have to be restricted to COVID-19 assistance; any cash donations to tax-exempt organizations (other than certain private foundations and donor-advised funds) in 2020 qualify for the new tax breaks.
- For donations by C corporations. A charitable contribution deduction for cash donations in 2020 is capped at 25% of taxable income (up from the usual 10% of taxable income limit).
- For other donors. Contributions by sole proprietorships, partnerships, limited liability companies, and S corporations aren’t claimed by the entities; they pass through to owners who claim them on their personal returns. Cash donations are deductible by individuals who itemize their personal deductions rather than claim the standard deduction in 2020 up to 100% of adjusted gross income (up from the usual 60% of adjusted gross income). Usually, those who don’t itemize can’t deduct anything, but for 2020, those who claim the standard deduction can write off up to $300 of charitable contributions on a 2020 personal income tax return. This dollar limit applies per “tax unit,” so the same amount applies whether you’re single or married filing jointly.
Donations of food inventory
Businesses that have given away food from their inventory can also take enhanced deductions thanks to law changes for 2020. These tax breaks apply as long as the food items are “apparently wholesome food,” which means they meet government standards for quality and labeling.
The increased deduction again depends on your entity-type:
- For C corporations. The deduction usually is equal to the lesser of (1) basis plus one-half of fair market value in excess of basis or (2) two times basis. For 2020, the deduction is subject to 25% of taxable income (the same limit applicable to cash donations).
- For other entities. Donations of food inventory by owners of sole proprietorships, partnerships, limited liability companies, and S corporations usually are limited to 15% of net income from these pass-through businesses. For 2020, this limit is increased to 25%.
What hasn’t changed
While some things have changed when it comes to charitable contribution deductions, some things remain the same.
- The tax treatment of donations from inventory other than food are unchanged. Generally, the deduction is limited to the lesser of cost or the items’ fair market value; these items are removed from opening inventory. For C corporations, an enhanced deduction applies to donations to organizations benefiting the care of the ill, elderly, or infants.
- You can’t deduct donations made directly to an individual, no matter how needy. Only donations to IRS-approved organizations can be deducted. Search the list of such organizations from the IRS.
- Contributions in excess of applicable limits (e.g., C corporation donations more than 25% of taxable income) can be carried forward for up to five years.
- It’s still essential to obtain required substantiation. Without it, legitimate donations are nondeductible. For donations of $250 or more, required substantiation means a written acknowledgment from the charity. Different substantiation rules apply to other types of donations. You can learn more about substantiation in IRS Publication 526.
Amid the COVID-19 crisis, many fake charities have popped up to steal money and the personal identities of generous people. Of course, continue to be as generous as your heart and your wallet allow, but beware of the party to whom you are giving