hidden limitations

[A version of this text appeared in the most recent issue of the author's newsletter, the Jack Straw Fortnightly, asterisk, or occasional.]

As many readers will already have heard, the so-called "unlimited" charitable deduction for outright cash contributions to (b)(1)(A) charities enacted last March as part of the Cares Act has been extended through 2021 as part of the disaster relief measure that was tacked on to the appropriations bill at the end of December.

The other day a senior gift planner at a state university somewhere in the northwest e-mailed me to ask whether someone who had made cash contributions during calendar 2020 in excess of her adjusted gross income could elect to treat the excess as "qualified" for the "unlimited" deduction in 2021, rather than simply carrying it forward subject to the fifty pct. limitation.

Instinctively you want to say "no," otherwise the extension would to this extent not be an incentive for additional giving this year, but an after the fact tax benefit to folks who had already made whatever commitments they were going to make last year.

But of course you need to find support for your answer in the legislative text. We do not have, and we are unlikely to get, formal guidance from IRS, since everything we are looking at is temporary.

The question arises because the measure extending the "unlimited" deduction for cash gifts to (b)(1)(A) charities through 2021 accomplishes this by reaching into the definition of "qualified contribution" itself, as set forth in section 2205 of the Cares Act, and simply adding "or 2021" after the reference to calendar year 2020.

In other words, the querent is asking whether a cash contribution made in calendar 2020 is still a "qualified" contribution in 2021, for which you can elect to deduct up to your entire contribution base.

For example, if she made cash contributions of 1,000x last year but had AGI of only 600x and so was able to use only that amount, can she deduct the entire remaining 400x this year, again assuming AGI of 600x. Or would she be limited to fifty pct. of AGI, that is, 300x. And carry the remaining 100x forward yet another year.

Let's reason through this. And let's begin with section 2205 of the Cares Act, which is what the extender amends.[fn. 1]

Subsection (a)(1) says if you make the election, the limitations of 170(b) and (d) do not apply, except as provided in (a)(2), which says

(i) you are limited to the excess of your "contribution base," effectively AGI, over amounts subject to lower limitations, and

(ii) any excess is carried forward and "added to the excess" described in section 170(b)(1)(G)(ii),

which is where we have carryforwards of cash contributions subject to the temporary sixty pct. limitation. And note that these carryforwards are not themselves deductible up to the sixty pct. limitation, they are subject to the default fifty pct. limitation per section 170(d)(1).

The point being that even though a cash contribution in either 2020 or 2021 may be "qualified" by making the election, you still have to go back to (a)(2), which says any excess over your available contribution base is carried forward. You cannot "elect" for 2021 any portion of the amount contributed during calendar 2020, because you did not make the contribution during 2021.

But let's look more closely at the scenario our querent is proposing. Cash gifts during calendar 2020 of 1,000x, adjusted gross income in each of 2020 and 2021 of 600x. Because the next question is, do we want to elect to treat the entire amount of cash contributions to (b)(1)(A) charities as "qualified" for the "unlimited" deduction, even for 2020.

And it turns out this may depend on whether you also had contributions and/or carryforwards subject to lower percentage limitations.

There are at least four ways you could approach this:

(a) If you made no election, you would deduct 360x for 2020 under the temporary sixty pct. limitation and carry 640x forward up to five years, subject each year to the fifty pct. limitation. Any amounts subject to lower percentage limits in 2020 would be forced into carryforward.[fn. 2]

(b) If you elected the entire amount, your limitation for calendar 2020 would be 600x, including any amounts subject to lower percentage limitations, which would not be forced into carryforward, and the excess, which might therefore be more than 400x, would again be carried forward up to five years, again subject each year to the fifty pct. limitation.

But you still might want to elect less than the entire amount in order to preserve the marginal value of the deduction, as the last dollar is coming from the lowest rate bracket. How would this work.

(c) If you elected only the excess of your contribution base over amounts subject to lower limitations, you might achieve the same result as in alternative (b). But maybe not. Maybe the fact that you made cash contributions that would be subject to the temporary sixty pct. limitation would force you back into alternative (a), "wasting" a carryforward year for items subject to lower limitations.[fn. 3]

Unless.

(d) Unless you were able to preclude this result by electing everything over fifty pct. of your contribution base. But this does not solve the problem of taking some portion of your deduction against the lowest rate bracket.

Of course, much of the preceding discussion assumes we have items subject to lower limitations for which we do not want to "waste" a carryforward year. If we are looking only at cash, we could select some middle ground between 360x and 600x, balancing the marginal rate against the time value of money, etc.

[fn. 1]

As is typical of temporary measures allowing "unlimited" deductions for contributions to disaster relief efforts, from which it was cribbed, section 2205 does not directly amend Code section 170, but says "qualified" contributions are to be "disregarded" in applying the lower percentage limitations.

[fn. 2]

We mentioned this anomaly in Jack Straw three comma five last May, noting that the Joint Committee had said this was a drafting error, but also noting that there has been no effort to enact a technical correction.

[fn. 3]

Any cash contributions to (b)(1)(A) charities you did not elect to treat as "qualified" for the "unlimited" deduction would default to the sixty pct. limitation. Even absent formal guidance from IRS, this much is clear from the discussion in IRS Publication 526, for which the current revision is still in draft.