How to Let Donors Know New CARES Act Offers Deduction Opportunities

The Coronavirus Aid, Relief, and Economic Security (CARES) Act signed on March 27, 2020 includes a number of provisions designed to rescue an economy being decimated by a pandemic the likes of which the world has seldom, if ever, seen. 

With plenty of news coverage of this legislation, little light has been shined on how it takes into account the ways nonprofits will suffer – and specifically how this legislation can help. You probably know something about the availability of special grants or loans and benefit reimbursements, as well as how employees can take advantage of new unemployment and extended health care benefits [Also see here.] Individual states and localities may have additional organizational assistance available as well. This is all terrifically helpful in terms of taking care of expenses.

But what about income? 

With many nonprofits finding they must reduce services or shutter their doors for the foreseeable future, the only income available to them right now is contribution income. Less has been written about how the new CARES Act helps in this regard.

Let’s remedy that right now!

What donors don’t know, they won’t take advantage of – and that will be to everyone’s detriment.

Anything you can you do to encourage tax-deductible donations right now is something you should do, right? And, you’re in a bit of luck. Because charitable support is critically important to the survival of the social benefit sector, the Act includes several provisions to encourage charitable giving. You need to be aware of these provisions so you can share them with your supporters.

IMPORTANT NOTE: I always recommend you let donors know you are not in the business of offering professional legal or financial advice, and they should consult with their own advisors.

3 New Opportunities to Incentivize Charitable Giving

1. Above-the-line universal charitable deduction.

This provision is the one I find most useful for nonprofits of all sizes. It provides for a universal, above-the-line, deduction of up to $300 cash made by anyone who takes the standard deduction; they don’t need to itemize to benefit from this provision. This will reduce their taxable income for 2020. Maybe not by a lot, but it makes giving to you less expensive for donors. That’s right. This is $300 they won’t have to pay taxes on, even if they don’t itemize. So why not let your donors know?

You may recall the Tax Reform Act of 2017 significantly reduced the incentive to itemize deductions. And, predictably, the number of Americans claiming the itemized charitable deduction dropped significantly – from roughly 36.8 million households claiming it for the 2017 tax year to just 13.8 million households claiming it for the 2018 tax year. Why? Because people could choose between (1) taking the standard deduction (which was nearly doubled), or (2) itemizing. The latter only made sense if your total deductions exceeded the standard deduction ($12,400 for singles or $24,800 for married-filing jointly in 2020) – and that was a pretty high barrier for many donors. Especially since the deduction for state and local taxes, which would have made itemizing worthwhile for more donors, was limited to $10,000.  

This year is different. Since this year any taxpayer can take this above-the-line $300 deduction, scenarios will vary – but will always be positive – for donors in any tax bracket.

Be aware that the lower your donor’s bracket, the lower the savings. For example, for donors in the 10% bracket a $300 gift would cost $270. Perhaps not a particularly persuasive offer. However, if you have donors in the 32% bracket, they’d have paid $96 in taxes on $300 of income. So if they give you $300 it only costs them $204. This may be a way to encourage folks in higher brackets to upgrade their gifts this year. 

There are caveats of which you must be aware when talking with donors (Section 2204 of the CARES Act amends the IRS Code, adding new § 62(a) (22)). 

• Gifts must be made in cash.
• Gifts must be made to a public charity, not to a supporting organization, private foundation or donor advised fund.
• Gifts must be made in 2020 (or after; this is not currently limited to just this year), and cannot be carried over from excess contributions made in a prior year yet treated as made in 2020.
• Gifts made are eligible for the above-the line deduction in addition to the standard deduction.

2. Cash contribution caps lifted for itemizers who give to public charities.

Suspension and relaxation of percentage limitations for cash gifts means donors who itemize can give more as a percentage of their adjusted gross income (AGI) and still benefit from a tax deduction. You’ll want to make your major donors aware of this provision of the CARES Act. Because those who can afford to make large cash contributions this year may be able to avoid significant capital gains and income taxes.

Previously, deductible gifts to public charities were generally limited to 60% of a taxpayer’s adjusted gross income (AGI); this year there’s no cap and donors can deduct up to 100% of AGI for 2020. Any excess contributions available can be carried forward for the next five years, subject to the 60% AGI limit previously in place. For corporations, the new law raises the annual limit from 10% to 25% of taxable income.

A few caveats of which you should be aware (language I suggest using: “From what I know, this is true for 2020; you will want to consult with your own advisor for the most accurate, up-to-date information”):

• Gifts must be made in cash to qualify for the 100% of AGI deductibility. The limit for gifts of appreciated long-term capital gains property is 30% of AGI. Donors might consider generating cash and decreasing taxes by:
  • Selling depreciated securities that have declined in value below their cost. They could then realize the capital loss and contribute the cash. 
  • Using a capital loss to offset gain on sale of appreciated assets, thereby avoiding capital gains taxes and using the cash proceeds to make a charitable gift without a percentage limitation.
  • Selling appreciated securities. While they’d recognize a capital gain, they could donate the sale proceeds to eliminate taxation of ordinary income.

• Gifts must be made to a public charity, not to a supporting organization, private foundation or donor advised fund.
• The increased deduction is not automatic; it must be elected. It is likely the IRS will provide further guidance as the 2020 tax filing deadline approaches.
• It’s possible the deduction could be disallowed if the donor also makes noncash contributions. Because of a drafting error in the 2018 tax legislation, it appears the 60% percentage limitation was only allowable to taxpayers making no noncash contributions in the same year. It was expected this would be fixed in technical corrections but that has not yet happened. This is certainly something a donor would want to discuss with their advisor were they contemplating making both generous cash gifts exceeding 60% of AGI and non-cash charitable contributions.

3. Required minimum distributions (RMDs) from qualified retirement plans, including IRAs, are suspended. 

This will likely reduce the incentive to make charitable rollover distributions from IRAs in 2020 for most donors. Donors can still do this if they wish, but most donors will likely wait until 2021.

Some donors, however, will see this as an opportunity because there will no longer be a $100,000 limit on the amount they’re allowed to transfer to charity from their IRA. Due to the unlimited charitable deduction allowed for cash gifts this year – even exceeding 100% of AGI – donors can ask IRA holders to sell assets (above the amount of the RMD) and distribute the proceeds to them in cash. They can then turn around and donate the cash, realizing an offsetting income tax deduction for the full amount. This may be the only year they can do this. Up until now, donors had to wait to transfer IRA assets in excess of the $100,000 allowable annually until their death. And those assets could be assessed both income and estate taxes.

What You Can Do To Inspire Donors to Take Advantage

The whole point of these changes made by Congress was to encourage increased giving to nonprofits feeling the strain of operating during this pandemic.

But donors need your encouragement. The majority won’t find out about these incentives without your help. And, in fact, most donors never give without your help. If you don’t ask, you won’t get.

There are a number of ways you can proceed.

1. Talk to your major donors. Let them know they may be able to increase their giving this year by taking advantage of these 3 key changes to tax deductibility under the CARES Act.
2. Write to your donors. The good folks at Stelter have written a templated letter you can send to inform donors of new contribution opportunities. Download Donor Letter (DOC).
3. Develop a special campaign to encourage $300 donations. Encourage everyone to take advantage of this one-time universal deduction opportunity, noting that if their employer matches gifts they could potentially benefit you to the tune of $600 – or more (some companies are increasing their match ratio this year – and the list is growing.)
4. Put this information on your website. You can put this in multiple places, including:

• • On your home page if you’ve added something special about helping you through this crisis.
  • On your general donation landing page.
  • On your special project donation landing pages.
  • On your planned giving donation landing pages.
  • On your ‘other ways to give’ donation landing page.

Again, I always recommend adding a disclaimer that you are not in the business of providing professional legal or financial advice, and donors should consult with their own advisors to ascertain how these opportunities may complement their own personal, philanthropic and tax planning objectives.

Please join me in Clairification School where I’ll be writing and discussing much more on how to respond intelligently to the unprecedented times in which we find ourselves. When life gives you lemons, sour though they may be, it’s best to make lemonade. The CARES Act gives us a little sugar we can add into the mix.