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Breaking Down the Tax Provisions in the CARES Act

April 03, 2020

Donating to charities may mean a lower tax payment in 2020, thanks to the newly passed law to deal with the economic fallout from COVID-19.

The Coronavirus Aid, Relief and Economic Security Act (CARES) provides new tax incentives for individuals and corporations making charitable contributions. The act also allows nonprofits and other tax-exempt organizations to take advantage of certain benefit programs typically provided to businesses.

Brief summaries and break downs of the act and its tax provisions are posted below.

Deductions for Charitable Contributions

Before passage of CARES, only taxpayers who filed itemized tax returns were able to take advantage of tax deductions resulting from donations to charity. But now, taxpayers who do not itemize can take a tax deduction of up to $300 for certain qualified charitable donations. The new tax benefit is expected to provide a giving incentive to middle-class families and other taxpayers typically claiming the standard deduction ($12,200 for individuals and $24,400 for couples) under the 2017 tax law.

To receive the deduction, the charitable contribution must be in cash and made to a publicly supported charity (generally a 501(c)(3) organization that is at least 30 percent supported by the public). The deduction is not available for contributions made to donor-advised funds or non-operating private foundations (private foundations that grant money to other charitable organizations).

CARES also expands tax incentives for corporations and those who itemize their deductions. Previously, individuals who itemized were only permitted to claim a charitable contribution deduction of up to 60 percent of their adjusted gross income. Under CARES, the percentage limitation is removed for qualifying cash contributions made in 2020 as long as the contributions do not exceed the individual’s adjusted gross income.

To take advantage of this deduction, individuals must make an affirmative election on their 2020 tax returns, and the deduction limit may not be used for contributions to donor-advised funds or non-operating private foundations. CARES also increases the limits on cash contributions for corporations from 10 percent to 25 percent of the corporation’s taxable income. The limitation for contributions of food inventory is also increased from 15 percent to 25 percent.

Expanded Benefits for Nonprofit Organizations

CARES also allows certain types of nonprofits and other tax-exempt organizations to take advantage of the following programs:

  • Paycheck Protection Program.
    • 501(c)(3) and 501(c)(19) organizations may apply for loans under the Paycheck Protection Program. Assuming the organization meets the relevant eligibility requirements, it can receive a loan in an amount covering up to 2 ½ months of payroll costs or $10 million, whichever is less. The loans may be used for payroll, mortgage interest payments, rent, utilities and certain existing debt obligations. Additionally, the loan is forgiven in an amount generally equal to the payroll costs, mortgage interest payments, rent and utilities paid or incurred by the recipient during the eight-week period beginning on the date of the origination of the loan.
  • Economic Injury Disaster Loans.
    • Certain types of 501(c)(3) organizations may also apply for an Economic Injury Disaster Loan (EIDL), which provides immediate grants of up to $10,000 and loans of up to $2 million. The EIDL program also allows payments of interest and principal to be deferred for up to four years.
  • Payroll Tax Credit.
    • Tax-exempt 501(c)(3) organizations may also receive a payroll tax credit in an amount equal to 50 percent of qualified wages. However, the tax credit is only available if the organization: (i) has not received a loan under the Paycheck Protection Program, (ii) experiences a decline in gross receipts above 50 percent and (iii) has experienced either a whole or partial shutdown due to a governmental-order issued in response to COVID-19.

Please contact Todd Denison, Luke Nixon or Phelps’ Tax team if you have any questions or need compliance advice and guidance. For more information related to COVID-19, please also see Phelps’s COVID-19: Client Resource Portal.