The authors of the CARES Act (aka, the two-trillion dollar federal stimulus response to COVID-19) rightly recognized the desire of individuals, foundations, and businesses to support non-profit organizations in this age of economic hardship. As a result, donors can enjoy new added tax benefits for aligning their dollars with their values right now. Here’s how:
Wealthy donors can give in higher amounts, while saving more money in the process.
Individual donors who are well positioned to give generously, regardless of their income, should know about this tax code change for the year 2020: according to Section 2205 there is now no limit to the deductions you can take for charitable contributions if you itemize (list out) your contributions. Previously, you could only deduct up to a maximum of 60% of your adjusted gross income (AGI) via charitable contributions. But under the new guidelines, 100% of your donation would now be tax deductible, meaning if your taxable income is $500,000 in 2020, and you give away $500,000 to qualified organizations in 2020, you won’t have to pay taxes on your income. Today In: Investing
You can also donate more than 100% of your AGI, but it won’t all be counted in 2020. As tax expert Bernie Kent explains, “Consider a taxpayer who has $1 million of AGI for 2020 and would like to make a $3 million charitable contribution this year. In prior years the income tax deduction would be limited to $600,000. For this year only, the CARES Act allows a charitable contribution deduction of $1 million. However, that would still leave a $2 million charitable contribution carry forward (subject to the 60% of AGI limit) in the subsequent five tax years.”
This change applies only to cash gifts made to charitable organizations qualified by the IRS (section 170(b)(1)(A),0). You can search the IRS website database to make sure your favorite homeless service center, human rights organization, or religious institution is tax exempt before making a donation. Additionally, this incentive doesn’t apply to contributions to private foundations or to donor advised funds — only individual giving.
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If you’re able to extend your generosity in this unprecedented challenge, this major tax incentive may be an important part of your calculus; whether you were already planning on making personal contributions to public charities, or are just getting started on your direct giving journey. Knowing everyone’s case is unique, make sure to consult with your tax advisor before getting your pen out.
Anyone who gives up to $300 can get an easy tax break.
Under the CARES Act, taxpayers can now take a deduction for up to $300 in charitable contributions if they don’t itemize on their 2020 tax form. This is a flip from the previous rule that required itemization for a tax break.
According to law firm McGuireWoods LLP, “Because of the significant increase to the standard deduction for individuals after the enactment of the 2017 Tax Act, it is estimated that more than 85% of taxpayers will not claim itemized deductions on their federal income tax returns for tax year 2019. As a result, many people have learned they did not or will not receive any direct tax benefit for their 2019 charitable contributions.” Ouch! However now, it’s easier than ever for donors to be sure of their tax savings while supporting the organizations they care about, whether they’re able to contribute $50 or $300.
“To constitute a qualified contribution, the contribution must be made during the 2020 calendar year… In addition, a taxpayer must elect to receive the benefit of the increased charitable deduction for any qualified contributions” outlines Skadden, Arps, Slate, Meagher & Flom LLP. “The act does [yet] not specify the mechanism for making this election,” but presumably, if you’re a “calendar year” taxpayer (the 12 consecutive months beginning January 1 and ending December 31), then you will just have to make sure you opt-in to the benefits on your 2020 income tax return.
Corporations can receive a higher tax break for their charitable giving.
For corporations looking to extend their charitable giving, the CARES Act raises the annual cash gift limit from 10% to 25% of corporate taxable income. In regards to making sure the deduction comes through, attorneys note that in the case of partnerships or corporations, each partner or shareholder must individually elect to receive the benefit of the increased charitable deduction on their taxes. Like with individual giving, the tax benefit does not apply to contributions toward Donor Advised Funds. The goal is to directly deploy funds to nonprofits on the ground who are in need of rapid support.
Anyone can donate food and get a tax deduction.
In addition to cash donations, the CARES Act now incentivizes food donations in a major way. The tax deduction available for food inventory has been raised from 15% to 25% for the 2020 taxable year, in the face of heightened visibility and exacerbation of food insecurity during this crisis. Taxpayers who donate food to their local food pantry can claim the value of that food on their taxes. On a larger scale, if you’re a restaurant with an income of $100,000, and you donate $25,000 worth of food inventory, you can reduce your business’s taxable income to $75,000. And if you’re able to donate more than 25% of your AGI — let’s say $50,000 — you’ll still only be able to write off $25,000 this year, and the additional $25,000 will carry over to the next year (where the tax deduction limit will likely return to 15% of AGI).
Private foundations are called to give — and invest — with their values.
While foundations are not explicitly incentivized in the CARES Act or other recent legislation to deploy more capital to the communities they serve during the pandemic, many private foundations are reconsidering their role during a crisis and either pulling back, or stepping up.
To the dismay of many, some institutions are reacting to the pandemic by putting a freeze on their aid while they reorient a strategic plan. But those who are suffering can’t wait months or years while that capital is frozen. As a result, other foundations are stepping up to the plate. Last week, on the Skoll World Forum virtual panel discussion “From Crisis Comes Opportunity: Re-imagining Our Economic Systems,” organization leaders from Solidaire Network, Nonprofit Finance Fund, Justice Funders, Agbo Consulting, and Common Future discussed the importance of reducing barriers and restrictions in application processes to get money out the door at record speeds, as well as increasing the sheer scale of their deployment.
In fact, family foundations like Libra Foundation and the Mary Reynolds Babcock Foundation — two foundations that partner with my firm Candide Group on their impact investing portfolios — have responded to the moment by not only committing to increasing their charitable giving: but outright doubling it. Notably, these foundations understand that grant-making is only a fraction of the assets that can be activated for good in this moment. Which brings us to the importance of another way to make a difference with your money: impact investing.
The mayhem on Wall Street in response to COVID-19 makes visible the instability of the capital market. For funders and activists alike, the crisis also presents itself as an opportunity to reconsider traditional public equities as a way to preserve foundation endowments, and instead more boldly invest in the businesses and funds that align with their values. The Global Impact Investors Network (GIIN) estimates that over 1,340 organizations, including foundations, individual investors, and family offices, already manage global impact investing assets of $502B — and is a movement that is growing alongside heightened social consciousness. Notably, while Wall Street just experienced “the worst quarter since the fourth quarter of 2008,” environmental, social, and governance ETFs have proven relatively resilient. Sustainable investment strategies are already outperforming the public markets, and many predict that private impact investing will overall outperform the public markets by the end of crisis.
In this historical moment, legacy will undoubtedly be defined by whether or not those positioned to contribute are indeed taking their wealth and responsibility seriously. The options are endless on the spectrum from donating to investing, so that we can collectively come out of the pandemic stronger.
On that note: how will you be giving?
Thanks to Jasmine Rashid for her contributions to this piece. Full disclosures related to my work here. This post does not constitute investment, tax, or legal advice, and the author is not responsible for any actions taken based on the information provided herein.
