Until 2020, deductions for charitable contributions under the Internal Revenue Code utilized the following hierarchy. Individuals could deduct up to 60% of their adjusted gross income for contributions to public charities (e.g. American Red Cross, most synagogues, houses of worship, educational institutions and donor advised funds ) of which up to 30% could consist of capital gain property (e.g. real property, life insurance policies). On the other hand, cash contributions to private foundations and similar charities could be deducted up to an amount equal to 30% of the individual’s adjusted gross income, of which 20% could be capital gains properties. Contributions not utilized in a current tax year can be carried forward and be deducted in the following five years.
The CARES Act (2020) and subsequent legislation increases the deductible amount solely for an individual’s “qualified contributions” – which are defined as cash contributions made during the 2020 and 2021 calendar years to public charities – to 100% of the individual’s adjusted gross income, subject to a reduction for other charitable contributions. Donations to donor advised funds and private foundations are not deemed “qualified contributions.”
The legislation also provides for an enhanced deduction for qualified contributions made by C corporations. Prior thereto, a “C” corporation’s charitable contribution deduction generally was limited to 10% of its taxable income. Under the new law, a C corporation is now entitled to deduct qualified contributions of up to 25% of its taxable income, reduced by the amount of any other charitable contributions for which a charitable deduction is allowed.
For members/shareholders of limited liability companies, partnerships, and “S”corporations, the contribution is reflected on the Form K-1 that they receive from the entity and the donation flows through to their personal returns.
The prior carry forward rules remain in effect for 2020 and 2021.
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