Since the COVID-19 pandemic hit the United States in early 2020, relief efforts have taken many forms—personal services, legislative efforts, volunteer hours, and even charitable contributions. Yes, when both people and corporations were in the midst of struggles, individuals and companies still made contributions throughout society. Although one hopes charitable contributions are not made for the primary reason of obtaining tax deductions, it is an added benefit that both individual and corporate taxpayers can enjoy under the Internal Revenue Code. That tax benefit was recently enhanced by federal legislation in December 2020 for corporate taxpayers. However, is the “enhancement” as helpful or sweeping as it seems?
Corporate Charitable Contributions, Generally
Generally, corporations cannot deduct charitable contributions that exceed 10 percent of their taxable income for a given tax year. Section 170 of the Internal Revenue Code provides, in part, the following: “The total deductions under subsection (a) for any taxable year (other than for contributions to which subparagraph (B) or (C) applies) shall not exceed 10 percent of the taxpayer’s taxable income.”
For purposes of Section 170(b), “taxable income” is computed without regard to the following:
- The deduction for charitable contributions;
- The dividends-received deduction;
- Any deduction allowed under Section 249 for bond premium;
- Any domestic production activities deduction;
- Any net operating loss carryback to the tax year; or
- Any capital loss carryback to the tax year.
Further, on March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law by former President Trump. The CARES Act provided, in part, that the limitation on a corporation’s charitable contributions under Section 170(b)(2)(A)—10 %—would be increased to 25 percent of taxable income.
Charitable Contributions for Disaster Relief
In December 2020, the federal government enacted the Consolidated Appropriations Act—both the U.S. House of Representatives and the U.S. Senate passed the bill on December 21, 2020, and former President Trump signed the bill on December 27, 2020. Part of the Consolidated Appropriations Act of 2021 included the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “TCDTRA”).
Section 304 of the TCDTRA, titled “Other Disaster-Related Tax Relief Provisions,” specifies special rules related to Qualified Disaster Relief Contributions:
(a) SPECIAL RULES FOR QUALIFIED DISASTER RELIEF CONTRIBUTIONS.—
(1) IN GENERAL.—In the case of a qualified disaster relief contribution made by a corporation—
(A) section 2205(a)(2)(B) of the CARES Act shall be applied first to qualified contributions without regard to any qualified disaster relief contributions and then separately to such qualified disaster relief contribution, and
(B) in applying such section to such qualified disaster relief contributions, clause (i) thereof shall be applied—
(i) by substituting ‘‘100 percent’’ for ‘‘25 percent’’, and
(ii) by treating qualified contributions other than qualified disaster relief contributions as contributions allowed under section 170(b)(2) of the Internal Revenue Code of 1986.
(2) QUALIFIED DISASTER RELIEF CONTRIBUTION.—For purposes of this subsection, the term ‘‘qualified disaster relief contribution’’ means any qualified contribution (as defined in section 2205(a)(3) of the CARES Act) if—
(A) such contribution—
(i) is paid, during the period beginning on January 1, 2020, and ending on the date which is 60 days after the date of the enactment of this Act, and
(ii) is made for relief efforts in one or more qualified disaster areas,
(B) the taxpayer obtains from such organization contemporaneous written acknowledgment (within the meaning of section 170(f)(8) of such Code) that such contribution was used (or is to be used) for relief efforts described in subparagraph (A)(ii), and
(C) the taxpayer has elected the application of this subsection with respect to such contribution.
As a result, corporations may temporarily deduct qualified contributions for disaster relief with an enhanced limitation of 100 percent of taxable income. Those contributions must be made between January 1, 2020 through February 25, 2021. Moreover, corporate taxpayers must still comply with recordkeeping requirements that apply to charitable contributions.
It should be noted that the Internal Revenue Service recently issued a news release related to corporate contributions for disaster relief. Among the IRS’s statements was a notable exception—the term “qualified disaster area” does not include any declared disaster related to the COVID-19 pandemic. Additionally, while Section 304 of the TCDTRA added an additional substantiation requirement—that the donating corporation must obtain a contemporaneous written acknowledgment (“CWA”) that includes a disaster relief statement (i.e., that the contribution was or is to be used for relief efforts in qualified disaster areas)—the IRS recognizes that some corporations may have already obtained their CWAs. Consequently, the IRS noted that it would not “challenge a corporation’s deduction of any qualified contribution made before February 1, 2021, solely on the grounds that the corporation’s CWA does not include the disaster relief statement.
The Internal Revenue Service’s recent news release provides more clarity to the execution of recent federal legislation. Perhaps corporate taxpayers will take advantage of the enhanced limitations on qualified contributions. However, carving out disaster declarations related to COVID-19 from “qualified disaster areas” may limit the legislation’s overall effectiveness for corporate taxpayers, at least with respect to qualified disaster relief contributions.
Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.
At Freeman Law, our experienced attorneys regularly guide our clients through complex state and local tax issues—issues that are frequently changing as states seek to keep pace with technology and the evolution of business. Staying ahead requires sophisticated legal counsel dedicated to understanding the complex state tax issues that confront businesses and individuals. Schedule a consultation or call (214) 984-3000 to discuss your local & state tax concerns and questions.
 I.R.C. § 170(b)(2)(A).
 I.R.C. § 170(b)(2)(D).
 These qualified contributions are reduced by any other allowed charitable contributions.
 The Consolidated Appropriations Act, 2021, H.R. 133 (enacted Dec. 27, 2020).
 Id. TCDTRA § 304(a).
 See IR-2021-27, January 29, 2021.
 Id. (emphasis added).