The Taxpayer Certainty and Disaster Tax Relief Act of 2020 generally extends through the end of 2021 four temporary tax changes originally enacted by the CARES Act. Here is a summary of the provisions (more details are available on the IRS site):
Deduction for individuals who don’t itemize; cash donations up to $600 qualify
Ordinarily, individuals who elect to take the standard deduction cannot claim a deduction for their charitable contributions. The law now permits these individuals to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. Since almost 90 percent of taxpayers now take the standard deduction, according to the IRS, this benefit is a boon to many.
These individuals, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married individuals filing joint returns. Cash contributions to most charitable organizations qualify, but see the IRS site for limitations.
100 percent limit on eligible cash contributions made by itemizers in 2021
Subject to certain limits, individuals who itemize may generally claim a deduction for charitable contributions made to qualifying charitable organizations. These limits typically range from 20 percent to 60 percent of adjusted gross income (AGI) and vary by type of contribution and type of charitable organization. For example, says the IRS, a cash contribution made by an individual to a qualifying public charity is generally limited to 60 percent of the individual’s AGI. Excess contributions may be carried forward for up to five tax years.
However, the law now permits electing individuals to apply an increased limit, up to 100 percent of their AGI, for qualified contributions made during calendar year 2021. Qualified contributions are contributions made in cash to qualifying charitable organizations. Again, there are some limitations.
Corporate limit increased to 25 percent of taxable income
The law now permits C corporations to apply an increased limit, the Increased Corporate Limit, of 25 percent of taxable income for charitable contributions of cash they make to eligible charities during calendar year 2021. Normally, the maximum allowable deduction is limited to 10 percent of a corporation’s taxable income. Again, the Increased Corporate Limit does not automatically apply. C corporations must elect the Increased Corporate Limit on a contribution-by-contribution basis.
Increased limits on amounts deductible by businesses for certain donated food inventory
Businesses donating food inventory that are eligible for the existing enhanced deduction (for contributions for the care of the ill, the needy, and infants) may qualify for increased deduction limits. For contributions made in 2021, the limit for these contribution deductions is increased from 15 percent to 25 percent. For C corporations, the 25 percent limit is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their aggregate net income for the year from all trades or businesses from which the contributions are made. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.
The IRS reminds both individual and business donors to keep good records of their giving, and it outlines recordkeeping rules on its site. Let us know if you have questions about donation rules.
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Nate is a trusted advisor for businesses and individuals, providing tax planning, compliance support, and accounting services. He also is certified as a Personal Financial Specialist which allows him to guide clients through the many challenges and phases of their career from start-up to retirement.