Analysis

COVID-19 Bill Adds Momentum To Expand Donor Incentives

Law360 (March 26, 2020, 4:07 PM EDT) -- An above-the-line deduction of up to $300 for charitable donations in the Senate-passed COVID-19 economic rescue package could spark bipartisan efforts to develop more incentives to help charities weather fallout from the new coronavirus.

Sen. Ron Wyden, the top Democratic tax writer, said more incentives could potentially be included in the next wave of legislation to address the economic effects of the COVID-19 virus. (AP)

Tax writers from both parties said the new incentive, along with several other provisions, was aimed at helping charities assist families hurt by the economic damage from the virus. They also said they hoped to develop follow-up legislation to help charities both recover from the virus and deal with the effects of the higher standard deduction in the 2017 Tax Cuts and Jobs Act , which diluted the appeal of the traditional itemized deduction  for charitable gifts.

“We’ve made a lot of headway on charities,” Sen. Ron Wyden, D-Ore., the top Democratic tax writer, told Law360, referring to the new provision in the rescue package and efforts to develop more incentives that could be included in the next wave of legislation to address the economic effects of the COVID-19 virus.

The above-the-line deduction generated some confusion among lawmakers and stakeholders in the final hours leading the Senate vote late Wednesday to pass H.R. 748, the Coronavirus Aid, Relief and Economic Security Act. That’s because it was described in a widely circulated bill summary as a temporary incentive for 2020 whereas the actual bill text said the provision would apply to all “taxable years beginning after Dec. 31, 2019.”

A senior GOP aide confirmed there was a disparity between the bill text outlining a permanent incentive and the summary’s description of a one-year provision.

“There may have been a drafting error,” the aide told Law360, referring to the bill text.

As drafted, the bill would make the above-the-line deduction a “permanent feature of the tax law,” Joseph Cordes, an economist at George Washington University, told Law360.

Roger Colinvaux, a professor at the Catholic University of America Columbus School of Law, also said the bill text would establish a permanent incentive, not a temporary one.

Sen. Jim Lankford, R-Okla., and Wyden both told Law360 that they and other senators had been told during negotiations that the above-the-deduction in the bill would be temporary. While both senators wait for expected House passage of the bill on Friday and for Treasury regulations to frame and carry out the provision, they said they would be looking for ways to advance more generous incentives for charitable giving.

Lankford said more incentives were needed because of concerns that the fight against the coronavirus had made it harder for charities to raise funds and deliver services.

“I would like to see the cap much higher. I would like to see it at $3,000,” Lankford said, referring the above-the-line deduction.

Other lawmakers have offered ideas for expanding the above-the-line deduction. Sen. Chris Coons, D-Del., ranking member on the Senate Appropriations subcommittee responsible for the Internal Revenue Service’s budget, said he was weighing a proposal to cap the deduction at 1% of adjusted gross income. A bipartisan proposal by Rep. Mark Walker, R-N.C., H.R. 5293, would cap the above-the-line deduction at a third of the standard deduction.

Senate Finance Committee Chairman Chuck Grassley, R-Iowa, has made clear in recent days that he will continue to explore ways to strengthen incentives for charitable giving and to encourage the efficient use of such funds by charities. But he has stopped short of backing specific new proposals.

Lankford and Wyden said they hoped to work with the chairman and other senators to build consensus for more incentives for charitable giving.

Advocates for charities have long sought an above-the-line-deduction for charitable gifts to provide a giving incentive to middle-class families, who now claim the expanded standard deduction — $12,400 for an individual and $24,800 for a married couple — under the 2017 tax law. The traditional charitable deduction is now used mainly by wealthy families, who can piece together enough deductions to itemize them rather than using the standard deduction.

While the above-the-line deduction would be available to nonitemizers, both Cordes and Colinvaux questioned whether it would have much of an immediate impact on charitable giving.

Colinvaux said in an email that it was hard to predict how much the crisis will affect taxpayer behavior, but he added that economic uncertainty would ensure that “charitable giving budgets for this year undoubtedly will take a hit.” In the future, he said, lawmakers could explore a different approach, such as setting a $250 donation threshold, or floor, with an above-the-line deduction for the next $300 in charitable gifts.

Still, Cordes said the new incentive could lay the groundwork for similar efforts to help charities.

“This is the camel’s nose under the tent. This establishes the principle that nonitemizers can claim charitable deductions,” Cordes said.

Besides the above-the-line deduction, the bill contained a temporary suspension for 2020 of the cap on the traditional charitable deduction, which was set at 60% of adjusted gross income — up from 50% — through 2025 by the 2017 tax law. The provision would also temporarily lift the cap on a corporation’s charitable deductions from 10% to 25% of taxable income and raise the cap on charitable contributions of food inventory from 15% to 25% of taxable income.

In addition to the two tax provisions, the bill would allow nonprofits organized under Internal Revenue Code Section 501(c)(3) to seek loans from a new $350 billion assistance program mainly designed for small businesses. The loans were supposed to be used for payroll, mortgage payments, rent and utility bills, and were designed to become grants if the recipients use the funds for qualified purposes.

Sen. Susan Collins, R-Maine, an architect of that program, said it was intended to send a lifeline to nonprofits under financial duress.

“This will help a lot of nonprofits — food banks, social service agencies and shelters — that are really struggling,” Collins said.

A drive for new measures to help charities began last year, when churches and other nonprofits successfully pushed for language to repeal the 2017 law’s tax on their employees’ parking benefits in a fiscal 2020 omnibus spending law  signed by President Donald Trump in December.

However, advocates for charities had gotten little traction for an above-the-line deduction for charitable donations until the effects of the new coronavirus began rippling through the economy.

Lankford said bipartisan deliberations on the pending rescue package had put a spotlight on charities and the need for tax incentives to help them survive and deliver services.

“What happens when government can’t fix all the issues? We’ve got to have engagement with not-for-profits,” Lankford said.

--Additional reporting by Stephen Cooper and David van den Berg. Editing by Tim Ruel and John Oudens.

For a reprint of this article, please contact reprints@law360.com.

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