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CARES Act Benefits that Can Help Your Clients Make the Most of Their Charitable Giving
By Brandon C. Gross, CPA, Director, Flagel Huber Flagel
As strategic and trusted advisors, most of us anticipated in 2020 that financial, tax and business planning would revolve around factors such as the economy, current tax law, personal goals and objectives, not to mention the presidential election. We anticipated fielding questions regarding if, what, when and how things may change due to these factors and the impact it could have on our clients.
Despite our best efforts to be proactive when the COVID-19 outbreak struck in March, we were forced to be reactive. We have had to pivot based on new legislation, the economic stimulus and evolving clarifications of rules, programs and laws. While much of the focus and discussion during the pandemic has been on individuals and for-profit businesses, nonprofit organizations continue to be hard at work navigating the impacts of the pandemic at a time when there is a continued (and potentially greater) need for their services.
As you may know, the CARES Act that was signed into law in March included significant provisions and programs, such as the Paycheck Protection Program, direct economic payments to individuals and increased unemployment benefits, among other provisions. For purposes of this article, I am going to focus on five significant changes that were made to the rules governing charitable giving for the 2020 tax year that could benefit your charitably inclined clients, while helping to support nonprofits struggling to continue their organization’s missions through these trying times.
(1) New Charitable Deduction Available for Non-Itemizers
a. Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
(2) Modified Limitation on Charitable Deductions for Individuals
a. The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) does not apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual's qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
(3) Modified Limitation on Charitable Deductions for Corporations
a. Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income does not apply to qualifying contributions made in 2020. Instead, a corporation's qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
(4) Increase in Limits of Contributions of Food Inventory
a. For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
(5) Required Minimum Distributions (RMD) waived for 2020
a. Taxpayers with an RMD from an IRA, 401K, 403b, 457b and inherited IRA plans in 2020 do not have to take their distributions this year. However, if they are over age 70 ½ and are charitable, they are still eligible to take a Qualified Charitable Distribution (QCD) from their IRA. A QCD allows them to make a federal and state income tax-free gift to a qualifying charity from their IRA. Depending on a client’s situation, an IRA still may very well be the best source of giving through this QCD option if he or she is charitable.
Case Study - Modified Limitation on Charitable Deductions for Individuals
Below is an example of the broader and potentially larger impact that the modified limitation on charitable deductions for individuals could have, while we discuss, evaluate and execute our planning strategies for the 2020 tax year.
For purposes of the above, it was assumed that there were no other contributions, deductions or credits. In this scenario, the individual was able to contribute the desired amount of $450,000 and, due to the increased limit from 60% to 100% of AGI, utilize the entire qualified contribution as a tax deduction in 2020. This resulted in a tax savings of $27,600. Under the CARES Act, the excess amount of qualified contributions not used is carried forward for up to the next five succeeding tax years.
The Dayton Foundation has several options that your charitable clients may wish to consider this year. First is a Designated Fund that allows donors to make grant awards to their chosen charity or charities. The second option is a Field-of-Interest Fund, which allows donors to support their particular area of interest, such as children, education, the arts, health or the environment. Another option is to use traditional IRA assets to create a Community Impact Endowment Fund. These funds help address our region’s changing needs by providing funding to increase the Foundation’s discretionary grantmaking and undertake new leadership initiatives. And finally, your clients may wish to establish a Dayton Foundation Scholarship Fund that encourages education by providing scholarships to deserving students based upon academic interest or other criteria.
The landscape is rapidly changing and causing many of us, including the clients and customers we service, to review scenarios that we hadn’t previously considered or were putting off for the future. Therefore, the scenarios discussed above are only a few of the potential options to consider in response to changes caused by the pandemic.
Although these are challenging economic times, clients still are expressing a desire and intent to support the causes and organizations about which they are passionate. Since the pandemic has caused many of us to re-evaluate, it is a crucial time to discuss with our clients the role and opportunities that philanthropy may provide when considering estate planning, appreciated securities, closely held stock or LLP interest, IRAs, and the uses of funds related to business owner or key employee’s proceeds from merger and acquisitions activities. With our help, clients can realize their charitable giving strategies, desires and capabilities now, and in the future.
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About the Author
Brandon C. Gross, CPA, has more than 12 years of experience in the financial services industry, including as the chief financial officer of a rapidly growing, entrepreneurial start-up. In his current role as director for Flagel Huber Flagel, Brandon directs the firm’s initiatives in the business advisory, outsourced accounting and CFO services practice areas.