February 25 deadline approaches for 100 percent deduction limit for certain corporate charitable cash distributions for disaster relief
In a recent release (IR-2021-27), the IRS explained how corporations may qualify for a new 100% limit for non-COVID-19 disaster relief contributions made to certain charitable organizations, and reminded taxpayers of the February 25, 2021, deadline for making such contributions. The IRS also relaxed certain recordkeeping requirements for corporations qualifying for the increased limit.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA 2020) temporarily increased the limit for the deduction against a corporation’s taxable income for cash contributions paid for relief efforts in qualified disaster areas. Enacted on December 27, 2020, TCDTRA 2020 increased the deductibility limit up to 100% of the corporation’s taxable income.
Unfortunately, for corporations wishing to make contributions related to COVID-19, the increased deductibility limit does not include any disaster related to COVID-19. Under the law, qualified disaster areas are those for which the president has declared a major disaster under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, other than COVID-19 related disasters. The president must have made the disaster declaration during the period from and including January 1, 2020 through February 25, 2021 for an occurrence specified by the Federal Emergency Management Agency as beginning after December 27, 2019 and no later than December 27, 2020. For a list of disaster declarations and the states and counties affected, visit FEMA.gov.
Some of the disaster declarations include the declaration for Hurricane Sally, which included certain counties in Florida, Alabama, and Mississippi, and the disaster declaration for certain counties in Michigan that were affected by severe storms and flooding in May 2020. FEMA’s website specifies the counties that each disaster declaration covers.
Qualifying corporate charitable contributions must be made by the corporation between January 1, 2020 and February 25, 2021. The time limit for making a qualified contribution is, thus, running out. Contributions made to a supporting organization or to establish or maintain a donor advised fund do not qualify for the increased contribution limit.
A corporation elects the increased deductibility limit by calculating its deductible amount of qualified contributions using the increased limit and by claiming the deduction on its return for the tax year in which the contribution was made.
Importantly, corporations making qualified contribution must satisfy the usual record keeping requirements applicable to charitable contributions, including obtaining a written acknowledgement from the charity contemporaneously with the contribution. The written acknowledgment must be obtained before the corporation files its return, but no later than the return’s due date, including extensions.
TCDTRA 2020 added an additional substantiation requirement for qualified contributions. Under TCDTRA 2020, the written acknowledgement the corporation receives from the charity must contain a disaster relief statement stating the contribution was used, or is to be used, by the eligible charity for relief efforts in one or more of the qualified disaster areas.
Because the TCDTRA 2020 was enacted at the end of 2020, it is possible that certain corporations have already received written acknowledgments that lack the disaster relief statement. As a result, the IRS is relaxing rules for such acknowledgments and will not challenge a corporation’s deduction as a qualified contribution made before February 1, 2021, if the sole reason for the challenge is the failure of a written acknowledgment to contain the required disaster relief statement.