How the CARES Act Impacts Business Charitable Deductions

Many businesses are still interested in donating to charity during the Coronavirus pandemic. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act revised the rules governing charitable deductions. Here are two changes that affect businesses:

Increased limit on charitable deductions for corporations

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The total charitable deduction that a corporation could generally claim for the year, before the CARES Act, couldn’t exceed 10% of corporate taxable income (as determined 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 (subject to the 10%-of-taxable-income limitation each year).

What changed under the CARES Act?

The limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. A corporation’s qualifying contributions, reduced by other contributions, can be up to 25% of taxable income (modified). A connection isn’t required between the contributions and COVID-19 activities.

Increased deduction limit on food inventory

At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities. A business is eligible for 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 the food contributions that could be considered 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.

What changed under the CARES Act?

The deduction limitation increases from 15% to 25% of taxable income for C corporations for contributions of food inventory made in 2020. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

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