As disruptive as the year has been for not-for-profit organizations, 2020 might end up being a better year for charitable giving. The potential for higher tax rates and decreased exemptions from estate and gift taxes under a new presidential administration may lead many high-net-worth individuals to increase charitable giving during 2020. At the same time, individual and corporate donors can benefit from temporary charitable giving incentives in 2020 that are available under recent tax law changes.
After an uncertain start to the year, giving appears to be strong with positive trends emerging in the philanthropy realm. Organizations will need to be particularly innovative to attract potential donors in an environment where large in-person fundraisers and other traditional drivers of donations remain off the table due to COVID-19 safety precautions.
Favorable Tax Conditions for High-Net-Worth Individuals in 2020
For 2020 only, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows an election to deduct cash charitable contributions to public charities up to 100% of adjusted gross income (AGI). The deduction is available to individuals who benefit from itemizing their deductions.
Changes from the CARES Act come on top of charitable giving provisions that had been enhanced by the tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA). Under the TCJA, the AGI limit for cash donations to public charities already were increased from 50% to 60%. The TCJA also repealed a phase-out on itemized deductions for higher-income filers, doubled the standard deduction, and capped the state and local taxes at $10,000 in aggregate. With itemized deductions curtailed for state and local taxes as well as certain other deductions, high-net-worth individuals may be revisiting how to make more out of their charitable donation incentives. For 2020, the CARES Act allows individuals who do not itemize deductions to claim up to $300 of qualified charitable contributions as an “above-the-line” deduction. Prior year charitable contribution carryforwards are not eligible for this special above-the-line deduction, however.
It’s worth noting that the incentives are for direct charitable contributions to qualified public charities. Contributions must be made in cash to a public charity during calendar year 2020. Public charities primarily include organizations whose missions support religious, charitable, scientific, public safety, literary, educational, or international amateur sports activities, as well as the prevention of cruelty to children or animals. Public charities also include churches, schools, hospitals, medical research organizations, and governmental units as well as state college and universities and private operating foundations. The classification further includes private non-operating foundations distributing all contributions to public charities and publicly supported organizations that receive a third of their support from the government or public donation.
The CARES Act also suspends temporarily the requirement to take minimum distributions from qualified retirement plans, which affects individuals who are at least 72 years old. This may affect donors who used charitable contributions to minimize potential taxes from the income associated with these minimum distributions.
Corporate Giving Strategies and Guidance
C corporations may also make deductible contributions to qualified public charities. Deductions are generally limited to a 10% of the corporation’s taxable income. Under the CARES Act, the taxable income limit for C corporations is temporarily increased to 25%, and the food inventory limitation is also temporarily raised to 25%. These provisions allow for a tremendous incentive for gifting this year, at a time when many organizations are desperate for funding in order to serve their communities. Excess corporate contributions can carry forward over a five-year period. In the case of charitable contributions by partnerships or S corporations, each partner or shareholder must make elections to treat separately stated contributions as qualified charitable contributions.
Presumably, a calendar year taxpayer will make the election on a 2020 tax return, and a fiscal year taxpayer will make the election on each income tax return that includes the date of the relevant contribution. The ability to make partial gift elections is not clear, and guidance from the IRS is forthcoming.
General Trends in Year-End Giving in the Pandemic Age
Virtual events are becoming popular as a way to keep not-for-profits engaged with communities during these uncertain and challenging times. There is no best practice or script to follow in terms of energizing donor outreach efforts, but attempting to capitalize on temporary tax deduction opportunities may be a strong play for end-of-year gift giving strategies.
Regardless of potential changes to tax laws, there are current benefits for charitable giving for high net worth individuals as well as those looking to reduce their taxable income. For more information about how trends could affect your not-for-profit’s charitable giving results, please contact us.
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Scott Goldberg is the Not-For-Profit Practice Leader for the New York office of CBIZ & MHM. He can be reached at 212.790.5713 or email@example.com.
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