Normally, corporations can only deduct charitable contributions up to an amount that equals 10 percent or less of their taxable income in the given tax year. Under the CARES Act, this limitation was bumped to 25 percent of taxable income.
More recently, the December 2020 Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) temporarily upped the limit for corporate charitable contribution deductions to 100% for qualified disaster relief contributions.
The IRS has released additional guidance for corporations considering using the deduction. Here’s what you need to know.
What is a qualified disaster relief contribution?
The 100% deduction only applies to donations made to relief efforts in a qualified disaster area. This includes any Presidential declaration of a disaster area between January 1, 2020 and February 25,2021 and that has also been specified as a disaster by FEMA between December 27, 2019 and December 27, 2020. A list of FEMA disaster declarations can be found here.
Unfortunately, the new deduction limit does not apply to disaster declarations related to COVID-19.
How do you claim the deduction?
A corporation can elect to use the increased limit by calculating its deductible amount of qualified contributions using the new limit and claiming this amount on its tax return for the tax year in which the contribution was made.
Recordkeeping and other requirements for the qualified disaster relief contribution deduction.
Importantly, the taxpayer must get a contemporaneous written acknowledgement (CWA) from the organization that the contribution is being used for a qualified disaster relief effort.
However, recent guidance issued by the IRS says that CWAs obtained without a specific statement saying that the contribution is being used for disaster relief will not be challenged by the agency on those grounds alone. The CWA must be obtained before the corporation files its return and no later that the due date for filing its return.
Other requirements in applying the upped deduction include:
- Contributions must be made in cash.
- Contributions made to a supporting organization or donor advised fund to not qualify.
- The increased deduction limit is temporary; it applies only to contributions made between January 1, 2020 through February 25, 2021.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.