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IRS Supports $300 Above–The–Line Deduction

In IR–2020–264, the Internal Revenue Service reminded taxpayers that there is a new temporary provision that permits $300 in charitable donations. The Coronavirus Aid, Relief and Economic Security (CARES) Act included several tax changes to encourage charitable giving. It created a $300 charitable deduction that is "above–the–line" and therefore permitted for individuals who take the standard deduction.

IRS Commissioner Chuck Rettig stated, "Our nation's charities are struggling to help those suffering from COVID–19 and many deserving organizations can use all the help they can get. The IRS reminds people there is a new provision that allows for up to $300 in cash donations to qualifying organizations to be deducted from income. We encourage people to explore this option to help deserving tax–exempt organizations – and the people and causes they serve."

Following the doubling of the standard deduction by the Tax Cuts and Jobs Act, there was a dramatic increase in the number of individuals who claimed the standard deduction. For 2020, the standard deduction is $24,800 for married couples, $18,650 for heads of households and $12,400 for single individuals. In 2018, over 87% of all taxpayers claimed this new higher standard deduction.

The CARES Act provision permits gifts to qualified nonprofits to be deducted up to $300 during 2020. This above–the–line deduction will lower both your adjusted gross income and taxable income.

Commissioner Rettig encouraged individuals to use the Tax Exempt Organization Search tool on to check to see that the nonprofit qualifies for tax–deductible donations.

The $300 donation may be made through a check, credit card or debit card. It may not include public securities, household goods or property gifts. The contribution must be in cash and may not be to a supporting organization or a donor advised fund.

All charitable deductions should be supported with appropriate records. A gift of $250 or more requires a receipt or "contemporaneous written acknowledgment" from the nonprofit prior to filing the return. Taxpayers should also retain a bank or other record for cash gifts, a canceled check or a credit card receipt. IRS Publication 526 has further guidance on the records needed to substantiate a charitable deduction.

The CARES Act included other temporary charitable giving provisions for 2020. Individuals who choose to itemize may deduct up to 100% of their adjusted gross income for cash gifts. Corporate donations and gifts of food inventory qualify for a 25% of taxable income limit.

Editor's Note: All of these provisions are intended to facilitate gifts to the entire nonprofit community. In a very challenging year, Americans with good intentions and good hearts are attempting to assist millions of our citizens who are in need.

Lame Duck COVID Stimulus Bill Possible

A bipartisan group of Senators and Representatives have released a proposed $908 billion COVID stimulus bill. The group's leaders are Sen. Mitt Romney (R–UT), and Sen. Joe Manchin III (D–WV).

The Senators and Representatives seek to jump–start the stalled negotiations on a new COVID stimulus bill. Senator Manchin stated, "We have a deep, deep desire to get something done before we leave."

The bill includes temporary coronavirus liability relief. This liability protection was a requirement of Senate Majority Leader Mitch McConnell (R–KY) in prior negotiations.

There are several provisions to assist individuals in the proposed bill. While the final language may be modified, the current proposal includes $300 each week of enhanced federal unemployment benefits, a pause on student loan payments, a moratorium on evictions, $16 billion for vaccine development and COVID–19 testing and tracing, enhanced unemployment benefits for gig workers and an extension of the unemployment program from the normal 26 weeks to 39 weeks.

Treasury Sec. Steven Mnuchin spoke to the Senate Banking Committee on December 1. He agreed that a December relief bill would be appropriate. Mnuchin stated, "We all believe there should be targeted fiscal response." He also pledged to resume discussions with House Speaker Nancy Pelosi (D–CA).

Senator McConnell indicated he would be publishing a new version of his targeted relief bill. The bill includes liability relief for businesses and expansion of Paycheck Protection Program Loans. A second loan for businesses would be permitted if there is a 25% reduction in quarterly revenue (for the second quarter of 2020 compared with the second quarter of 2019).

Lawmakers also discussed the possibility of increasing the $300 above–the–line deduction for charitable contributions.

Editor's Note: Sen. McConnell and Speaker Pelosi hope to reach an agreement early in the week on a final bill. The House and Senate may pass a COVID stimulus bill which could be signed as early as Friday, December 11, 2020.

Will PPP Loan Expenses Be Deductible?

As Congress debates a lame–duck COVID stimulus bill, there is growing support for a bipartisan proposal to make deductible the expenses covered by Paycheck Protection Program (PPP) Loans. The bipartisan proposal for a $908 billion COVID stimulus bill includes provisions to permit the deduction of business expenses, even though they have been covered by a PPP Loan.

While the final bill is still subject to negotiation, the proposal is to give state, local and tribal governments $160 billion, provide $180 billion in enhanced unemployment insurance benefits and add $288 billion to the PPP Loan funds. Businesses with a 25% second quarter drawdown could qualify for a second PPP loan.

Senate Finance Committee Member John Cornyn (R–TX) previously introduced a bill to make the PPP covered expenses deductible. He noted, "I do not know of any real opposition among lawmakers, so I would think it is a noncontroversial issue."

The primary objection to deductibility for expenses covered by PPP Loans has come from the Department of Treasury. The IRS and Treasury have opposed the deduction that was included in the original CARES Act because businesses would receive loan forgiveness and still be able to deduct expenses.

The deductibility of PPP Loan expenditures is supported by the Senate and House tax writing leaders. Finance Committee Chair Chuck Grassley (R–IA), Ranking Member Ron Wyden (D–OR) and House Ways and Means Committee Chair Richard Neal (D–MA) all support the deduction.

A coalition of businesses and associations strongly supported the deductibility measure. In a letter to Speaker Pelosi and Majority Leader McConnell, the coalition urged "Congress to enact legislation before the end of the year that includes a technical correction addressing the tax treatment of loan forgiveness under the Paycheck Protection Program (PPP)."

The coalition noted that the intent of the PPP Loan was to allow small business entities to pay employees, cover some non–payroll expenses and receive loan forgiveness. The Small Business Administration (SBA) provided $525 billion in PPP Loans to 5.2 million qualifying small businesses. These loans "preserved tens of millions of paychecks for their employees as the pandemic spread throughout the country."

The CARES Act included a provision that the loan forgiveness amounts "shall be excluded from gross income" for tax purposes.

However, the Internal Revenue Service issued Notice 2020–32, and Revenue Ruling 2020–27. The IRS stated that the expenses covered as a result of the forgivable PPP Loans would not be deductible. The coalition notes that this position by the IRS changes a tax–free loan into taxable income. This could lead to "a surprise tax increase of up to 37% on small businesses when they file their taxes for 2020."

Editor's Note: PPP Loans worked effectively to retain employees on payrolls. Many businesses retained their employees even with "little to no work to perform," and therefore complied with the intent of the program. The coalition urges Congress to not penalize these businesses and to make the expenses deductible.

Applicable Federal Rate of 0.6% for December -- Rev. Rul. 2020-26; 2020-50 IRB 1 (16 November 2020)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2020. The AFR under Section 7520 for the month of December is 0.6%. The rates for November of 0.4% or October of 0.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.

Published December 4, 2020
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