If you own a small business, you know how important it is to support various charitable causes, both within your own community and throughout the world. But as you know, there are always changes related to your taxes and how your charitable donations may be done from one year to the next. As 2021 begins, it is important for you to be aware of several changes to charitable donations, some of which have been done so via the CARES Act passed by Congress in 2020. If you are a small business owner and make it a priority to provide charitable donations each year, here is what you need to know going forward in 2021.
The Basics
As part of the year-end spending package that was passed by Congress at the end of 2020, the basics involved for charitable donations focus mostly on two major tax changes related to charitable giving. In essence, these changes will boost the tax deductions charitable donors can take, allowing them to make larger donations to charities while doing so at a lower net cost. However, donors must also be aware that if the value of charitable gifts is overstated on tax returns, IRS penalties have been greatly increased for doing so.
Above the Line Tax Deduction
The first important change for small business charitable donations in 2021 is the above the line tax deduction. This deduction, both an extension and enhancement of the tax break Congress enacted with the CARES Act, allows individuals to take a tax deduction for cash gifts made to charities of up to $300. For married couples who file jointly, they can receive double the deduction in 2021 if they make cash gifts of at least $600 to charity. This marks a change from 2020, when this deduction was only $300 per tax return. However, charitable gifts made to private donations or donor-advised funds are not covered by this provision.
Why This Change is Important
While to some this change may not sound extremely important, it is considered to be a major change in how it will impact the amount of money donated to charitable causes in 2021. When tax laws were changed in 2017, the result was far fewer people choosing to itemize their deductions, in particular the gifts they made to charity. Yet with this change, the above the line deduction will now allow those who do not itemize on their tax returns the opportunity to take a charitable deduction.
Reduction of Adjusted Gross Income
Because this is an above the line deduction, taxpayers will receive additional benefits in 2021. For example, since the deduction will reduce adjusted gross income, it will thus open up additional tax breaks for which you can take advantage of in tax year 2021. As an example, a married couple who files jointly in 2021 and provides charitable gifts of $600 will not only get the $600 tax break from this, but will also be able to take the standard deduction of $25,100 for joint filers. As a result, if a couple is in the 37% tax bracket, they would save as much as $222 in taxes.
Individual and Corporate Givers
Another change that will have a significant impact in 2021 focuses on those charitable donors, both individual and corporate, who make large-scale donations. This change, which was put into effect in 2020 under the CARES Act and is extended into 2021, will eliminate the percentage of AGI limits for all charitable deductions. Thus for individuals, the adjusted gross income limitation of 50% will be eliminated. For corporations, the change will be an increase from a limitation of 10% to instead 25% of taxable income.
IRS Penalties
While the above-mentioned changes are considered to be very positive and likely to result in additional giving to charities, those doing so will face much stiffer penalties should they overstate the value of their charitable gifts. Under new IRS guidelines in 2021, a penalty of 50% of your total deduction will be assessed, which is an increase from only 20% under previous IRS law.
Employers Matching Charitable Gifts
Now that these changes have taken effect, it is also important to note that any charitable gifts made may also be eligible for matching contributions by employers. In 2020, employees across the United States contributed over $500 million to charities on their own, which was an increase of 76% from 2019. However, many companies will restrict the charities to which they will give matching contributions. In many situations, companies may not provide matching gifts to charities associated with religious organizations as well as colleges or universities.
Helping the Majority of Taxpayers
As these changes have taken hold, the end result is that they will be of help to the vast majority of taxpayers, who in past years have chosen to take the standard deduction at tax time rather than choose to itemize their deductions. If you rely on Form 1040 for your taxes, a new line 10b has been added to the form that allows you to report your donations. However, remember that the donations must be cash donations, not goods.
Needless to say, these above-mentioned changes can be complex and confusing to most taxpayers. As a result, you should never try to make sense of these new regulations on your own. Instead, it is always best to consult with a CPA who has the necessary experience and knowledge to know how these deductions can benefit you the most when filing your taxes. Since you naturally want to give as much as possible to the causes you believe in, listen to the advice of your CPA and make sure you receive the tax breaks open to you in 2021.