The CARES Act also provides incentives to donors to 501(c)(3) organizations. There is a new deduction for total charitable contributions of up to $300 made by an individual taxpayer. This is an “above the line” deduction so all taxpayers would be eligible to take the deduction, even those who use the standard deduction. The deduction would not apply to noncash gifts or to gifts contributed from donor advised funds. It would apply to contributions made in 2020 and therefore would be claimed on tax forms/filings next year.
In addition, for those individuals that itemize their deductions, the Act would suspend for 2020 the usual limit from the existing cap on annual contributions from 50 or 60 percent of adjusted gross income (AGI) to 100 percent.
For corporations, the annual charitable contribution limit for 2020 which is usually 10 percent of AGI is increased to 25 percent and donations of food by corporations would increase from the 15 percent cap to 25 percent.
What does “above the line” deduction mean?
Some deductions can be taken “above the line”- these above-the-line deductions are subtracted from your income before the adjusted gross income (AGI) is calculated. The number of above-the-line deductions directly affects the amount and type of “below-the-line” deductions for which you’re eligible. Below-the-line deductions include any deduction reported on a line that comes after the AGI calculation. While both deductions help to reduce your taxable income, some can have a more favorable impact on your taxes than others.
In most cases, above-the-line deductions are more beneficial to taxpayers. See below to find out why.
You can take above-the-line deductions with the standard deduction.
The standard deduction is a fixed amount that’s based primarily on your filing status, which reduces your taxable income. Each tax season, you have the choice to deduct your actual itemized deductions or take the standard deduction. Typically, the choice is determined by whichever amount is higher. Above-the-line deductions benefit you whether or not you itemize your deductions.
Above-the-line deductions reduce your adjusted gross income.
Your adjusted gross income includes your total income, including wages, business and rental income, capital gains, unemployment income, etc. It also factors in any allowances for itemized deductions. Above-the-line deductions are technically adjustments to your income. These adjustments include items such as traditional IRA contributions, moving and education expenses, alimony payments, and the deductible portion of self-employment tax. Above-the-line deductions can also refer to business deductions and losses.
Why does your adjusted gross income matter?
Your adjusted gross income may be used for many calculations on your tax return. Every dollar that reduces your AGI not only reduces your taxable income, but it may help you qualify for other deductions as well. Various credits are limited by your adjusted gross income. In some cases, an adjustment may help you qualify for a credit or other tax perk that you would not receive otherwise.
So, what does this mean for not-for-profit organizations?
Because the CARES Act allows this new above-the-line deduction for total charitable contributions of up to $300, this encourages individuals and corporations to donate to not-for-profit organizations and be able to deduct it from their AGI.
Other Paycheck Protection Program (PPP) Resources
For more information on the Paycheck Protection Program (PPP) loan details, click here.
For more information on payroll costs, click here.
For a top line overview of the program, click here.
If you’re a borrower, more information can be found here.
The application for borrowers can be found here.
If the Payroll Protection Program (PPP) isn’t something you can take advantage of, check out the SBA Economic Injury Disaster Loan (EIDL) here.