The rules governing the deduction of charitable contributions can be pretty strict. However, legislation has relaxed a number of them as long as donors take advantage of them by the end of 2021. So, both individual and businesses taxpayers should get up to speed on the temporary rules and take out their checkbooks before year-end.
Here’s a summary of the temporary rules, which are applicable only for 2021.
Deduction for Individuals Who Don’t Itemize
Usually, taxpayers who take the standard deduction cannot deduct their charitable contributions. However, the law now permits taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions they made to certain qualifying charitable organizations. They can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.
100% Limit on Eligible Cash Contributions Made by Taxpayers Who Itemize
Taxpayers who itemize can generally claim a deduction for charitable contributions to qualifying organizations. The deduction is typically limited to 20% to 60% of their adjusted gross income (AGI) and varies depending on the type of contribution and the type of charity.
The law now allows taxpayers to apply up to 100% of their AGI, for the calendar year 2021 qualified contributions. Qualified contributions are cash contributions to qualifying charitable organizations.
But the IRS emphasizes that this 100% limit is not automatic; taxpayers must choose to take the new limit for any qualified cash contributions. Otherwise, the usual limit applies. The taxpayers’ other allowed charitable contribution deductions reduce the maximum amount allowed under this election.
Most cash donations made to charity qualify for the deduction. However, there are some exceptions, such as money given to donor-advised funds, private foundations, and charitable remainder trusts. These restrictions apply whether taxpayers itemize or take the standard deductions.
Cash contributions include those made by check, credit card, or debit card as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization. Cash contributions don’t include the value of volunteer services, securities, household items, or other property.
Corporate Limit Increased to 25% of Taxable Income
The temporary breaks apply to businesses too: The law now permits C corporations to apply an increased corporate limit of 25% of taxable income for charitable cash contributions made to eligible charities during the calendar year 2021. As above, the increased limit is not automatic. C corporations must choose the increased corporate limit on a contribution-by-contribution basis.
Increased Limits for Certain Donated Food Inventory
Businesses donating food inventory that are eligible for the existing enhanced deduction may qualify for increased deduction limits. For contributions made in 2021, the limit is increased to 25%. For C corporations, the 25% limit is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their total net income for the year. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.
This is just a summary; both businesses and individuals should get professional tax advice about their deductions. One thing is certain: These special provisions are slated to end in 2021, so everyone should make their charitable plans now.
If you need help claiming this deduction on your personal or business tax return, give us a call.