Amy Hansen, Author at PHB-Piehl Hanson Beckman

4 Big Charitable Tax Breaks for 2021

Are you feeling generous? Qualified charitable contributions can be rewarded with sizeable tax breaks during the second calendar year of the COVID-19 pandemic. Recent legislation includes the following four temporary tax law changes that are designed to help individuals and businesses that donate to charities through the end of 2021.

What Is a Cash Contribution?

Most cash donations made to charity in 2021 qualify for the limited-time deduction for non-itemizers. (See main article.) But there are some exceptions. Notably, cash contributions that aren’t tax deductible include donations:

Made to a supporting organization,
Intended to help establish or maintain a donor-advised fund,
Carried forward from prior years,
Made to most private foundations, and
Made to charitable remainder trusts.

Important: These exceptions also apply to taxpayers who itemize their deductions.

Cash contributions include those made by check, credit card or debit card, as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization. However, cash contributions do not include the value of volunteer services, securities, household items or other property.

1. Deductions for Non-Itemizers

In the past, you could claim significant itemized deductions on your federal income tax return for contributing money or property (or both) to qualified charitable organizations during the tax year. But there was no corresponding tax break for non-itemizers. In other words, if you claimed the standard deduction, you realized no tax benefit for charitable donations.

However, the CARES Act authorized a deduction of up to $300 for monetary donations made by non-itemizers during 2020. (See “What Is a Cash Contribution?” at right.) Then the Consolidated Appropriations Act (CAA) extended this tax break to 2021 and doubled the limit to $600 for joint filers. If a married couple files separately, each spouse may deduct up to $300.

2. Annual AGI Limit

The IRS imposes certain annual limits on deductions for charitable contributions made by individuals. For instance, previously you could deduct an amount for monetary contributions equal to no more than 60% of your adjusted gross income (AGI). Any amount above the 60%-of-AGI limit was carried over for up to five years. For these purposes, monetary contributions include cash and cash-equivalent contributions.

However, the CARES Act increased this limit to 100% of AGI for 2020. Now the American Rescue Plan Act (ARPA) has extended this tax break through 2021. That means you can effectively wipe out the full amount of your personal tax liability by donating money to qualified charities.

Important: The 100% limit isn’t automatic. A taxpayer must choose to use this new limit for any qualified cash contributions. Otherwise, the usual limit applies. The taxpayer’s other charitable contribution deductions reduce the maximum amount allowed under this election.

3. Corporate Deduction Limit

Similar to individuals, the tax law limits the amount that a C corporation can deduct on its corporate tax return for monetary contributions made to charity. Normally, the deduction limit is 10% of the company’s taxable income. For example, if a corporation has $1 million in taxable income, its deduction for donations of cash is limited to $100,000.

The CARES Act raised this threshold for corporations. It allowed a deduction in 2020 for monetary contributions to charity of up to 25% of taxable income. The ARPA has extended this limit for the 2021 tax year. But the increased limit isn’t automatic. C corporations must choose to use the increased corporate deduction limit on a contribution-by-contribution basis.

4. Donations of Food Inventory

Generally, a corporation that donates business property to charity can deduct an amount limited to the property’s cost. However, there’s a special tax break for donations of food inventory (for example, meals for families victimized by the pandemic). This tax break has expired and been reinstated several times in the past.

How much can your business deduct? A C corporation may deduct an amount equal to the property’s basis plus one-half the unrealized appreciation (but not more than twice the basis). The deduction also can’t exceed 10% of the corporation’s taxable income for the year.

First, the CARES Act increased the deduction limit to 25% of taxable income for 2020. The CAA extended this higher limit through 2021.

For other businesses — including sole proprietorships, partnerships and S corporations — the limit is based on the taxpayer’s total net income for the year. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.

Still Time to Donate

As the year winds down, both individual taxpayers and small businesses may look to boost their charitable donations to meet their philanthropic goals — and improve their overall tax picture. A donation that’s made to a qualified organization in 2021 is deductible for 2021 — even if it’s charged by credit card for an amount you actually pay in 2022.

Consider all relevant factors in your charitable-giving decisions and coordinate this with other parts of your year-end tax plan. Your tax advisors can provide additional guidance.

What is state tax apportionment and how do you calculate it?

State income tax is a direct tax on business income you’ve earned in a state. It sounds straightforward, but this is a complex topic: States have various ways of calculating how much of your corporation’s business income is attributable to its presence and activity there. Each state gets to decide what matters most — your payroll, property, or sales — and in what ratio to account for them. This can make calculating state income tax complex, particularly if you do business in multiple states.

Tax teams that are equipped with a knowledge of state requirements, and that have the technology to help track their many facets and frequent changes, are best positioned to stay in compliance.

What is apportionment in taxes?
Apportionment is the assignment of a portion of a corporation’s income to a particular state for the purposes of determining the corporation’s income tax in that state. The state determines how much of your earnings are a result of business done in that state so it can charge you the right amount of income tax. Allocation and apportionment in U.S. tax differ in that allocation covers non-business income, while apportionment covers business income.

Which type of businesses are subject to apportionment?
The only type of business that must pay state income tax the way an individual does is a traditional corporation, otherwise known as a C corporation or C corp. This is because C corps are considered taxable entities; they are required to file state tax returns separate from the personal returns filed by their owners and employees.

Other types of companies, such as S (Subchapter) corporations, limited liability companies (LLCs), and partnerships usually do not need to pay corporate income tax. Instead, they are subject to “pass-through taxation”; the individuals involved in the business pay state tax on their income from the business, while the business doesn’t pay separately.

What are the types of state apportionment formula?
There is no single rule defining the process of state apportionment. The formula differs from state to state. Most states use one of three apportionment formulas:

An equally weighted three-factor formula that takes payroll, property, and sales into account in equal measure, also known as the
A single sales factor formula, which bases taxes solely on a company’s sales within the state
A three-factor formula in which the sales factor is given different weight from the other elements, such as a double-weighted sales factor
States have differed on how to incorporate the sales factor in apportionment. In the early days of state tax apportionment laws, states did not include sales in the calculations, relying only on payroll and property. Over time, sales has become a more important factor in states’ apportionment calculations.

That shift has presented some difficulties: For example, one element of that decision is figuring out whether sales should be counted based on the customer’s location, the seller’s location, the location to which goods are delivered, or some other metric.

If a state can’t accurately capture a business’s activity by using any of the standard formulas, it can opt to use alternative methods of calculation for apportionment. A business may petition for the use of such an alternative, which might include separate accounting or customization of factors.

How do you calculate state tax apportionment?
States calculate apportionment in various ways depending on the formula being used.

Using the UDITPA, or three-factor formula, a state accounts for the percentage of a company’s payroll, property, and sales that were based in the state and then divides that number by 3 to come up with the percentage of income the state can tax. For example, if 50% of a company’s payroll, 50% of its property, and 20% of its sales are in New Mexico, the state would be able to tax 40% of the firm’s net earnings.

A single sales factor method makes for an easy calculation: The state can take the percentage of the company’s sales that took place in the state based on whatever standards the state maintains. If a company is in New York or Connecticut, for example, the state can tax 20% of the company’s profits if 20% of its sales are made in the state.

To calculate the apportionment for a three-factor formula with a variable sales factor, the formula still considers payroll, property, and sales, but it gives extra weight to sales. A common way of doing this is to give sales double the weight. In Massachusetts, for example, a company that has 20% of its profits in the state would add 40% into the formula for sales. After adding up the amounts — say 50% of property and 50% of payroll, plus the 40% of sales — you divide this number by 4. In this case, Massachusetts could tax 35% of the firm’s net earnings.

What challenges might tax teams face when calculating apportionment?
Multi-state apportionment can be a concern. Companies that do business in multiple states face the challenge of tracking corporate income tax laws in multiple — perhaps many — places. On top of that, sales tax laws are complex and frequently change. Staying in compliance across the board is extremely difficult, if not impossible, especially for small teams without a lot of bandwidth to track every detail of state tax law.

These teams need compliance solutions to stay on top of their company’s state income tax obligations. To help in navigating the complexity of tax rules and changes for each state, consider an industry-trusted tax and accounting research tool. It uses artificial intelligence and machine learning to deliver fast, accurate answers, updated forms and state-specific IRS insights to your thorniest tax questions.

To streamline your entire state tax apportionment process, consider a comprehensive tool such as the Thomson Reuters ONESOURCE State Apportionment module. This web-based software solution can help you manage your data, consistently apply the right calculation methods, and provide a trackable solution for audits. With tools such as these, even the smallest tax team can stay on top of everything it needs to know to manage state income tax.

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