This contribution base is defined in IRC section 170(b)(1)(H) as the taxpayer’s AGI computed without regard to any net operating loss carryback to the taxable year. This contribution base has been increased from 50% (or 60%, if all contributions are made in cash to public charities) of AGI for cash contributions, as introduced in the Tax Cuts and Jobs Act of 2017 (TCJA). In order to qualify for the increased contribution limitation, cash must be contributed to a qualifying public charity.
The Consolidated Appropriations Act of 2021 (CAA), passed in December 2020, extended the increased taxpayer charitable contribution deduction base throughout 2021. This allowed taxpayers who previously took advantage of the provision in 2020 an additional year to make qualifying tax deductible cash contributions of up to 100% of AGI. Furthermore, for donors who did not act to capitalize on the temporary removal of the AGI limitation in 2020, the CAA offered a second chance to contribute cash to qualifying public charities at a higher level and reduce taxable income.
Unlike some previous charitable giving incentives, the temporary suspension of the AGI limitation under the CARES Act and CAA is truly additive; the TCJA created additional requirements to determine the ultimate charitable limitation of 50% or 60%, while the CARES Act simply states that cash contributions are allowed after all other charitable contributions are considered. Section 2205(a)(2)(A)(i) of the CARES Act provides that “any qualified contribution shall be allowed as a deduction only to the extent that the aggregate of such contributions does not exceed the excess of the taxpayer’s contribution base [as defined in subparagraph (H) of section 170(b)(1) of such Code] over the amount of all other charitable contributions allowed under section 170(b) (1) of such Code.” Practically speaking, this means that the deduction for all other types of charitable contributions (e.g., non-cash/property contributions) will be computed and deducted first, based on the taxpayer’s AGI. If there is still AGI remaining to be offset, the taxpayer may elect to take a deduction for the additional qualified cash contributions up to the taxpayer’s entire remaining AGI. It is notable that for a taxpayer to utilize the increased contribution limitation, the taxpayer must make an election to have individual contributions treated as qualified contributions. Any unused qualified contributions can be carried forward for five years, subject to the AGI limit of either 50% or 60%.
Potential Benefit to Private Foundations
In addition to the benefit the charitable contribution deduction legislation may afford to individual donors, the enhanced deduction may also provide benefits to private foundations. Private foundations organized as trusts pay income tax on net unrelated business income. In arriving at net unrelated business income, trusts are allowed a charitable deduction under IRC section 512(b)(11) that looks to the deduction allowed under IRC section 170(b)(1)(A) and (B), not the 10% statutory limitation imposed upon private foundations organized as corporations under IRC section 512(b)(10). (While outside the scope of this article, the formation of a private foundation where unrelated business income is expected should consider the organizational form, as there may be a significant tax difference.)
If a private foundation is organized as a trust and makes grants of cash to qualifying public charities in 2020 or 2021, it has the potential to take a deduction of up to 100% of taxable income and not pay any unrelated business income tax. For example, a private foundation with assets worth $2 billion may have an annual distribution requirement of roughly $100 million (5% of $2 billion). Therefore, even if the foundation generates $100 million in unrelated taxable business income, it could potentially be allowed offsetting charitable deductions to the extent it had made those required qualifying distributions as cash grants to qualifying public charities in 2020 or 2021.
Another potential benefit to private foundations and their donors comes from the increased 100% AGI limit for individuals who make cash contributions to qualifying public charities. Included in the definition of qualifying charities is a private foundation making an out-of-corpus election, as described in IRC section 170(b)(1)(F). A valid out-of-corpus election requires the private foundation to:
- Satisfy its own required distribution of income for the current and all prior tax periods, commonly known as the 5% minimum distribution requirement; and
- Make an out-of-corpus election, which includes—
- Redistributing an amount equal to 100% of all contributions received by the private foundation in the current tax year,
- Making an out-of-corpus election on the foundation’s current year tax return to treat the redistribution of cash from the foundation as distributions made on behalf of individual donors; and
- Providing individual donors with a detailed list of the public charity grantees to which the private foundation has made qualifying distribution of cash and has not utilized the distribution for any other purpose. (This detailed list, combined with proof of the election, is an out-of-corpus report.)
In addition to the benefit the charitable contribution deduction legislation may afford to individual donors, the enhanced deduction may also provide benefits to private foundations.
A properly executed and documented out-of-corpus election by a private foundation allows an individual donor to contribute cash to a private foundation and take a deduction as if the contribution had been made to a public charity. Private foundations must make qualifying distributions to satisfy their own 5% distribution requirement and provide individual contributors with the documentation of the out-of-corpus election, as described above. Individual donors then attach the out-of-corpus report to their tax return, allowing them to elect to take the tax deduction at the higher AGI limit afforded to donations to public charities in 2020 or 2021.
The Treasury Regulations section 53.4942(a)-3 provides the details for the timing and documentation requirements for a private foundation to make an out-of-corpus election. IRC section 170(b)(1)(F) looks to IRC section 4942(g) for purposes of qualifying a private foundation as a public charity by making qualifying redistributions (grants) to public charities, within the specified time period, and providing proper documentation to individual donors. Individual donors must attach the out-of-corpus report received from the private foundation with the detailed list of private foundation grantees to their tax return to substantiate the deduction. All other charitable substantiation requirements of IRC section 170 must also be met.
A Limited Window
Unless extended again, this temporary suspension of the limitation on the charitable contribution base will expire at the end of 2021. Until then, individuals and some private foundations should be aware of the potential benefit of these provisions, which will ultimately flow to public charities.
This article contains general information only and is not a substitute for professional advice. Used with permission from Deloitte Development LLC © 2021.