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Explainer: What The New CARES Act Charitable Tax Incentives Mean for Donors and Companies

Joel Pollick
Posted by  Joel Pollick on Apr 8, 2020

For donors and companies thinking about how to make a positive impact during this critical time, donate; doing so is now both altruistic AND financially beneficial.

The new $2 Trillion COVID-19 Stimulus Package--the CARES Act--was passed into law on March 27th, 2020. It will help our country #CombatCorona; one big way it will do so is by incentivizing charitable giving--which is incredibly important right now as our nation’s nonprofits are supporting our most vulnerable communities and first responders on the front lines.

Read on to learn why the CARES Act has established financial incentives for everyday donors, large donors, and companies to step up like these charities have and donate--now!

How the CARES Act incentivizes everyday donors to give more

What the bill says.

Section 2204. Allowance of partial above the line deduction for charitable contributions. The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not. (Source: Senate Finance Committee)

What Section 2204 of the CARES Act means for everyday donors

What the bill means.

Section 2204 moves charitable contributions from below-the-line to above-the-line. This is huge!

Above-The-Line: Deductions you can take without needing to itemize them on your tax forms. Examples include:

  • Retirement Plan Contributions--IRAs, 401(k)s, etc.

  • Health Insurance Contributions

  • Health Savings Account (HSA) and Medical Savings Account (MSA) Contributions

These reduce your taxable income and can be taken with the standard deduction.

The-Line: The point where Uncle Sam (or Turbo Tax) calculates your tax bill.

Below-The-Line: Deductions you can take that you have to itemize on your tax forms. Examples include:

  • Charitable Contributions (before now)

  • Mortgage Interest

  • Property Taxes

These can be itemized and taken instead of the standard deduction. Most people simply take the standard deduction because these add up to less than $12,000 (the standard deduction for individuals).

Giving is now partially pre-tax! Now people can donate up to $300 in 2020, deduct that amount from their taxable income and STILL take the standard deduction.

Why everyday donors should donate at least $300 in 2020--and beyond

A simplified example.

Let’s say you take home $1,000 a year--so $1,000 is your taxable income.

Before, giving $300 would have been altruistic, but done nothing to reduce your taxes. Uncle Sam (or TurboTax) would calculate your tax bill based on that $1,000 in taxable income. You would then take the standard deduction, subtract that from your tax bill, and pay Uncle Sam the net (or receive a refund if the net is negative).

Now, giving $300 is both altruistic and financially beneficial! Now you can deduct that $300 from your taxable income, which means Uncle Sam (or TurboTax) would calculate your tax bill based on $700 ($1000 - $300) instead of $1,000. You would then also take the standard deduction, which is now being subtracted from a smaller number, and pay Uncle Sam the net (or receive a refund if the net is negative).

Hopefully this example shows you why it’s now a no-brainer to donate at least $300 in 2020. And this change is permanent, so give at least $300 in 2020--and beyond!

How the CARES Act incentivizes large donors and companies to give more

What the bill says.

Section 2205. Modification of limitations on charitable contributions during 2020. The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50-percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25 percent of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent. (Source: Senate Finance Committee)

What Section 2205 of the CARES Act means for large donors and companies

What the bill means.

Section 2205 makes charitable giving even more financially beneficial for large donors and companies.

For large donors who itemize, Section 2205 removed the limitations--cap--on deductions for charitable contributions. Large donors itemize because they are giving enough to where the aggregate of those donations is greater than the standard deduction. Large donors could previously deduct up to 50% of their adjusted gross income with donations; now they can deduct up to 100%--the limit was totally removed for 2020.

For companies, Section 2205 increased the limitations--or cap--on deductions for charitable contributions. Companies could previously deduct up to 10% of their taxable income with donations; now they can deduct up to 25%.

Lastly, for both groups, this change applies to Qualified Contributions. Cash donations to exempt hospitals, churches, public charities, private operating foundations, “flow-through” private foundations, and employer-sponsored disaster relief funds are included; non-cash donations or cash donations to private non-operating foundations, supporting organizations and donor-advised funds are excluded.

In layman’s terms, large donors and companies now have financial incentive to give even more--and just need to confirm that new donations are Qualified Contributions.

Why large donors and companies should now give more

A simplified example.

For large donors, let’s say you make $500k. Before you could donate $500k--and deduct $250k; now you could donate $500k--and deduct $500k--to “zero out” your 2020 tax bill with charitable contributions. Large donors should now donate as much as they can.

For companies, let’s say you make $1m. Before you could deduct up to $100k in donations; now you could deduct up to $250k in donations. Companies should now look at their adjusted income projections and donate up to that higher 25% bar in 2020--if they are able.

Additional Reading

Joel Pollick

Written by Joel Pollick

Founder & CEO @ Percent Pledge. Expert in workplace giving, volunteering, and employee engagement for fast-growing companies.

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