In light of the novel coronavirus (COVID-19) pandemic, there’s been an increase in interest for business charity donations. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions. Here are two changes that affect businesses:
Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income. This amount is in determination with several modifications for these purposes.
Contributions in excess of the 10% limit are carried forward and may be used during the next five years. This is subject to 10% of taxable income limitation each year.
Under the CARES Act, the limitation on business charity deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). There are no requirements between the connection of contributions and COVID-19 activities.
At a time with high unemployment, your business may want to contribute food inventory to qualifying charities. In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy, or infants.
“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
Before the CARES Act, 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.
Under the CARES Act, for contributions of food inventory made in 2020, there has been an increase in the deduction limitation. This increase is from 15% to 25% of taxable income for C corporations. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the rules for business charity donations for individuals. Contact us if you have questions about tax deductions for charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.