Many businesses responded to the social and economic impact caused by the COVID 19 pandemic with increased donations to charity. Two changes to the Coronavirus Aid, Relief and Economic Security (CARES) Act incentivize these types of donations by increasing the limit on charitable deductions for businesses and corporations. Here are the two most significant changes:
Higher limits on deductions for charitable donations made by corporations
Prior to the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes). This limit has now increased.
What’s different? Previous limits on charitable deductions for corporations (10% of modified taxable income) no longer to apply to qualifying contributions made in 2020. Under the CARES Act, 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.
Increased deduction limit for food inventory
With unemployment on the rise, businesses may want to contribute food inventory to qualified charities. Businesses are typically entitled to a charitable tax deduction for donations of “apparently wholesome food” to organizations that provide for the care of the ill, the needy, or infants.
Any food that is intended for human consumption and meets all quality and labeling standards developed by federal, state, and local laws is considered “apparently wholesome,” even when it is not readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
Previously, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.
What’s different? Under the CARES Act, the deduction limit for C Corporations increased from 15% to 25% of taxable income in regards to food inventory contributions made in 2020. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
The CARES Act and Individuals
In addition to the changes impacting businesses, The CARES Act also modified the rules governing charitable deductions for individuals. Contact us if you have questions about making charitable donations and securing a tax break. We can explain the rules and compute the maximum deduction for your generosity.