Residents of the United States are frequently ranked as among the most generous in the world (Charities Aid Foundation World Giving Index, October 2019). Charitable contributions flowing from these taxpayers enable many churches, youth sports charities, and other not-for-profits to fulfill their charitable missions. However, many of these organizations are now experiencing a decline in giving as the United States finds itself grappling with a public health crisis.
In response, Congress included a provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, intended to provide some relief for charitable organizations. Section 2204 of the CARES Act permits eligible individuals who do not itemize deductions to deduct $300 of qualified charitable contributions as an "above-the-line" deduction, i.e., as an adjustment in determining adjusted gross income (AGI), for tax years beginning in 2020.
Allowing nonitemizers to deduct charitable contributions is not a new concept. The Economic Recovery Tax Act of 1981, P.L. 97-34, allowed a charitable contribution deduction from AGI for nonitemizing taxpayers (Sec. 170(i), before deletion by the Omnibus Budget Reconciliation Act of 1990, P.L. 101-508). Although the amount of the deduction was generally limited to 25% of up to $100 in contributions (i.e., $25) for tax years 1982 and 1983, it climbed to 100% of up to $300 for 1986, after which it sunset.
Since then, Congress has introduced bills on multiple occasions to reestablish a charitable contribution deduction for nonitemizers or provide a larger one than the CARES Act's. These include the currently pending Universal Giving Pandemic Response Act, S. 4032, and a companion bill, the Universal Charitable Giving Act of 2019, H.R. 5293, both of which would provide a deduction of up to one-third the amount of the taxpayer's standard deduction (i.e., for tax year 2020, $4,133 for single individuals and $8,267 for married individuals filing jointly). S. 4032 would also allow contributions made under this provision after Dec. 31, 2019, and before July 15, 2020, to be treated as made in calendar year 2019.
QUALIFYING FOR THE DEDUCTION
Under new Sec. 62(a)(22), for tax years beginning in 2020, eligible individuals may deduct up to $300 in qualified charitable contributions made to qualified charitable organizations. Any amount that exceeds the $300 limit may not be carried forward to future tax years or claimed as an itemized deduction (Sec. 62(f)(2)(C)). Moreover, charitable contribution itemized deduction carryforwards arising in tax years beginning before 2020 may not be claimed as an above-the-line deduction.
The Joint Committee on Taxation (JCT) estimates the government's revenue loss for the new deduction at $310 million and $1.241 billion in fiscal years 2020 and 2021, respectively (Description of the Tax Provisions of Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act (JCX-12R-20) (April 23, 2020), p. 107). This projected revenue effect is considerably lower than the estimated $96.75 billion revenue reduction from itemized charitable contribution deductions in fiscal years 2020—2021 (Tax Expenditures, U.S. Department of the Treasury, Office of Tax Analysts, Feb. 26, 2020) or the $180.5 billion in cash charitable contribution deductions by individuals for tax year 2017 (IRS Tax Statistics, Individual Income Tax Returns, Table 2.1).
An individual eligible to claim the deduction is any individual who does not elect to itemize deductions for 2020 (Sec. 62(f)(1)). The $300 limit per filing unit applies regardless of filing status.
QUALIFIED CHARITABLE CONTRIBUTION
A qualified charitable contribution for purposes of Sec. 62(a)(22) is a charitable contribution as defined in Sec. 170(c) (Sec. 62(f)(2)). Such contributions must be made in cash, not taking into account the revised percentage limitations of Sec. 170(b). (The CARES Act also effectively suspended the ceiling for qualified charitable contributions made in 2020 by limiting the deduction to 100% of the taxpayer's contribution base (CARES Act §2205).) Therefore, contributions of noncash property are not allowed as an above-the-line deduction. However, these contributions are still available for individuals who itemize their deductions.
Cash contributions are any contributions paid with "cash, check, electronic fund transfer, payroll deduction, etc." (IRS Publication 526, Charitable Contributions). No part of a gift that a donor makes in consideration for goods or services received is a contribution for this purpose (Regs. Sec. 1.170A-1(h)). Sec. 170(f)(8) requires that for any cash contribution over $250 the taxpayer must keep a "contemporaneous written acknowledgment" of the donation. The substantiation requirement applies on a gift-by-gift basis (IRS Publication 526). Because the $300 charitable contribution deduction qualifies as a deduction under Sec. 170(c), one can reasonably infer that the substantiation requirement applies to it in the same way as to an itemized charitable contribution deduction.
QUALIFIED CHARITABLE ORGANIZATION
A qualified charitable organization is any organization that qualifies as a public charity under Sec. 170(b)(1)(A) (Sec. 62(f)(2)(C)(i)). The contribution cannot be made to a supporting organization described in Sec. 509(a)(3) or to a donor-advised fund.
In general, a contribution to a charitable remainder trust does not qualify as a charitable contribution. But if the charitable remainder interest is paid in cash to a qualified charity during the applicable time period, then the amount may still qualify as a contribution under Sec. 62(f)(2) (JCT, Description of the Tax Provisions of Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act (JCX-12R-20) (April 23, 2020), pp. 22—23, 26).
However, a couple of issues might arise for taxpayers claiming the $300 above-the-line deduction. First, low-income taxpayers whose AGI does not exceed the standard deduction will largely fail to realize the deduction's intended benefit. Even if these individuals do have any taxable income before credits, nonrefundable credits (e.g., the child tax credit, child and dependent care credit, etc.) may reduce their taxable income — and, in turn, their tax liability — to zero.
The second issue might arise when a married individual filing a separate return whose spouse itemizes deductions is not eligible for the standard deduction (or has a zero standard deduction), raising the question of whether such an individual may claim the above-the-line charitable deduction(Sec. 63(c)(6)(A)). Assuming such an individual does not also itemize deductions, an above-the-line charitable deduction would seem to be available, since ineligibility for a full standard deduction is not, per se, an election to itemize (Sec. 63(e)(1)). But some IRS guidance on this point would be welcome.
Practitioners with clients who do not regularly itemize post-TCJA should consider alerting these taxpayers to the above-the-line charitable contribution deduction. The amount may be relatively small, but in the throes of a health care crisis, every bit can make a difference — in this case, for both the donor and the donee.
John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice of accounting and taxation at Cornell University in Ithaca, N.Y.; Luke Richardson, CPA, M.Acc., is an instructor in accounting and taxation at the University of South Florida in Tampa, Fla.; and Jonas Lee, MPS, is a recent graduate in accounting from Cornell University. To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com.