Planning for new charitable contribution limits

Editor: Christine M. Turgeon, CPA

New limitations on charitable contribution deductions for both corporations and individuals who itemize deductions were introduced by the law known as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119–21, effective for tax years beginning after Dec. 31, 2025.

Corporations can deduct aggregate charitable contributions only to the extent they exceed 1% of taxable income (floor) and are not more than (the preexisting) 10% of taxable income (ceiling). Amounts below the 1% floor could be permanently disallowed. For individuals who itemize deductions, charitable deductions are allowed only to the extent contributions exceed 0.5% of their contribution base — generally, adjusted gross income (AGI) — with disallowed amounts potentially carried forward, subject to existing limitations. These changes also indirectly affect partnerships, as contribution limits apply at the partner level when partnership donations flow through to corporate or individual taxpayers.

New rules applicable to corporations

The new 1% floor on corporate charitable contribution deductions under Sec. 170(b)(2)(A) could lead to a permanent disallowance of part or all of a corporation’s charitable contributions. For the purposes of the floor, taxable income is calculated with modifications under Sec. 170(b)(2)(D) that exclude certain deductions and carrybacks.

Contributions greater than the 10% limit are carried forward for up to five succeeding tax years and taken into account on a first–in, first–out basis. Although the statutory language is ambiguous, absent clarifying guidance, it appears charitable contributions disallowed under the 1% floor may be carried forward only in years in which charitable contributions exceed the 10% limit.

For example, assume that a corporation has taxable income of $100 in a tax year (i.e., a $1 floor and $10 ceiling). A contribution less than or equal to $1 would appear to be permanently disallowed. Contributions of $5 would appear to result in a permanent disallowance of $1, with the remaining $4 deductible. Contributions of $12 would appear to yield a deduction of $9, with the remaining $3 carried forward over five tax years. The $3 carryforward then would be subject to the same limitation of a 1% floor and a 10% ceiling in the following tax year, along with that year’s contributions. Thus, the new 1% floor raises an important business decision regarding whether a corporate taxpayer may want to donate more than 10% of taxable income to avoid the permanent disallowance of contributions under the floor. 

Individual contribution limitations

Under the OBBBA’s floor on charitable contributions of individuals who elect to itemize deductions, pursuant to Sec. 170(b)(1)(I), any charitable contribution otherwise allowable as a deduction is allowed only to the extent that aggregate contributions exceed 0.5% of the taxpayer’s contribution base for the tax year. Similar to the carryforward rule applicable to corporations, charitable contributions disallowed by the 0.5% floor could be available as a carryover to up to five subsequent tax years, but only if the taxpayer’s charitable contributions are first limited by one or more of the AGI percentage limitations (generally, 60% for cash donations to public charities and 30% for donations to certain private foundations), thereby generating a current–year carryover.

For example, assume an individual with AGI of $100,000 itemizes deductions and donates $1,200 in cash to a public charity. The 0.5% floor is equal to $500, which means the individual can deduct $700 of the contribution ($1,200 minus $500), and the $500 floor amount is permanently disallowed. Conversely, if the same individual donates $65,000 in cash to a public charity, then the donation is first limited to $60,000 by the 60% AGI limitation, creating a $5,000 carryforward. Next, the 0.5% floor reduces the deductible amount of the contribution from $60,000 to $59,500. The $500 amount disallowed by the floor is added to the $5,000 carryforward, resulting in a total $5,500 carryforward to the subsequent year (where it will again be subject to both the AGI limitations and the 0.5% floor).

A deduction subject to the 0.5% floor is further subject to the overall limitation on itemized deductions under Sec. 68 for certain high–income individuals. The limitation applies after the 0.5% floor and reduces an individual’s itemized deductions otherwise allowable by a fraction (2/37) of the lesser of the taxpayer’s (1) itemized deductions or (2) taxable income (determined without regard to Sec. 68 and increased by itemized deductions) that exceeds the threshold for the 37% tax rate bracket (for 2026, $640,600 for single filers and $768,700 for married couples filing jointly).

The floor does not apply to individuals claiming charitable contributions under Sec. 170(p), which enables nonitemizing taxpayers to deduct certain cash charitable contributions up to $1,000 ($2,000 on a joint return) (reinstated and increased starting in 2026 by the OBBBA). In addition, the 0.5% floor does not apply to trusts or estates that claim a charitable contribution deduction under Sec. 642(c).

Disallowance and timing considerations

Given the new OBBBA limitations, the timing and frequency of charitable contributions could affect their deductibility. For example, taxpayers should compare making discrete donations over multiple tax years that otherwise would fall below the applicable floor to aggregating those same donations into one tax year to mitigate a potentially permanent disallowance. Consolidating multiple charitable contributions into a single year could help reduce the effect of the floor. In this regard, a corporation using an overall accrual method of accounting should consider that donations approved by the board before year–end and made within 3½ months afterward (e.g., by April 15 for calendar–year taxpayers) can be treated as a contribution for the prior year (Sec. 170(a)(2)).

Qualifying individuals with individual retirement accounts also could consider making qualified charitable distributions (QCDs) to reduce the effect of the floor. A QCD not only avoids the 0.5% floor but also excludes the distribution from AGI, which lowers the floor for all other charitable contributions and applies toward required minimum distributions.

Additionally, businesses may want to consider whether their 2025 taxable income is high enough to fully absorb 2025 contributions because any carryforward will be subject to the floors starting in the following tax year. Businesses may still be able to increase their 2025 taxable income in certain cases (e.g., by accelerating revenue recognition or deferring deductions with automatic accounting method changes under Rev. Proc. 2025–23 (subject to eligibility rules) or making specific tax elections permitted to be made by the due date (including extensions) of their timely filed 2025 tax returns).

Inventory donations

The amount of a charitable contribution of property generally is its fair market value (FMV), subject to certain reductions. For ordinary–income property such as inventory, the reduction generally is the difference between the property’s FMV and its basis, generally resulting in a charitable contribution deduction equal to basis under Sec. 170(e)(1). Similarly, the basis of inventory that is sold, scrapped, or otherwise disposed of by a taxpayer in a trade or business is included in cost of goods sold (COGS), as determined under the taxpayer’s method of accounting for inventory.

Sec. 170(e)(3), however, provides a special enhanced deduction for inventory contributed by a C corporation to a qualified tax–exempt charity that uses the inventory solely to care for the ill, needy, or infants in a manner related to the recipient organization’s charitable purpose or function. The amount of the enhanced deduction equals the lower of (١) the FMV of the inventory less 50% of the difference between its FMV and basis or (2) twice its basis. Thus, C corporations making qualified donations of inventory to charities that will use the inventory to care for the ill, needy, or infants and that obtain required documentation from the charity can take a charitable contribution deduction equal to the basis of the inventory plus 50% of the markup, limited to twice the basis. Trades or businesses that are not C corporations (those operating as S corporations, partnerships, or sole proprietors) can claim the enhanced deduction for charitable contributions of certain food inventory under Sec. 170(e)(3)(C).

If a C corporation contributes inventory that is not eligible for the enhanced deduction (or the C corporation chooses not to claim the enhanced deduction) under Sec. 170(e)(3), then the regulations under Sec. 170(e)(1) provide that inventoriable costs pertaining to contributed property that are incurred in the year of contribution must be treated as part of COGS for that year, as opposed to being treated as charitable contributions. In contrast, inventoriable costs incurred in tax years preceding the year of contribution must be removed from inventory and treated as a charitable contribution (Regs. Sec. 1.170A–1(c)(4)). As a result, a disparity arises between donations made from beginning inventory, which are treated as charitable contributions, and donations made from current production and purchases made during the contribution year, which may be treated as COGS. As a result, items contributed from opening inventory are subject to the taxable income limitations (including the new 1% floor), but items contributed from inventory purchased or produced during the year of contribution are not subject to the taxable income limitations. Further, if a C corporation claims the enhanced deduction under Sec. 170(e)(3), then the tax basis of the donated inventory and the enhanced deduction must be treated as a charitable contribution, regardless of whether the items are contributed from opening inventory or current production or purchases. Therefore, the full amount of the deduction is subject to the applicable taxable income limitations.

The introduction of the new 1% floor, which potentially results in permanent disallowance of donations from beginning inventory or inventory donations eligible for the enhanced deduction, could change the desire for C corporations to donate these items. Instead, companies may want donations to come from current production or purchases and forgo the enhanced deduction in order to secure a recovery of basis through COGS, or they could simply dispose of their inventory and claim a disposal loss. Neither would be subject to taxable–income limitations.

Special rules apply to donations of food inventory. First, the new 1% floor limitation does not apply to certain qualified contributions of food inventory (apparently wholesome food) to a charity that uses the food for the care of the ill, needy, or infants. In addition, the total deduction for charitable contributions of food inventory generally is limited to 15% of taxable income for C corporations and, for taxpayers that are not C corporations, to 15% of the taxpayer’s aggregate net income for the tax year from all trades or businesses from which the contributions are made.

Characterization of payments

The new floor that effectively disallows most charitable contributions made by many C corporations beginning after Dec. 31, 2025, (because corporations typically do not donate more than 1% of their taxable income) highlights the need to consider whether a payment made by a corporation to a Sec. 501(c)(3) organization is a charitable contribution under Sec. 170 or an ordinary and necessary business expense under Sec. 162.

To qualify as a charitable contribution under the Sec. 170 regulations and applicable case law, the transferor generally must have a donative intent and not receive a benefit that exceeds the payment. In this regard, Regs. Sec. 1.170A–1(h)(1) provides that no part of a payment that a taxpayer makes to or for the use of an organization described in Sec. 170(c) that is in consideration for goods or services is a contribution or gift within the meaning of Sec. 170(c) unless the taxpayer intends to make and makes a payment in an amount that exceeds the FMV of the goods or services.

In contrast, to qualify as a business expense under the Sec. 162 regulations and applicable case law, the transferor must have a business intent and receive a benefit commensurate with the payment. More specifically, under Regs. Sec. 1.162–15(a), a payment or transfer to or for the use of an entity described in Sec. 170(c) that bears a direct relationship to the taxpayer’s trade or business and that is made with a reasonable expectation of financial return commensurate with the amount of the payment or transfer may constitute an allowable deduction as a trade or business expense. Thus, the distinction between a charitable contribution or a business expense is highly factual and depends on its purpose, intent, substantiation, and the benefit expected or received in return for the payment.

Companies often contribute money to Sec. 501(c)(3) organizations that closely align with their business, which could support a view that the contributions are made with a profit motive and the expectation of a financial benefit in return, based on case law such as Marquis,49 T.C. 695 (1968); Stubbs, 428 F.2d 885 (9th Cir. 1970); Transamerica Corp., 392 F.2d 522 (9th Cir. 1968);and Singer Co., 449 F.2d 413 (Ct. Cl. 1971). For example, in Singer Co., the Court of Claims addressed whether contributions in the form of discounts on sewing machines given to organizations qualifying under Sec. 170(c) were deductible under Sec. 170 or Sec. 162. The court held that discounts given to schools provided the taxpayer with a quid pro quo because teaching students to sew increased the future potential market of people who would purchase a home sewing machine, making these discounts deductible under Sec. 162. In contrast, the court found the discounts given to other charities, such as churches and other charitable organizations, were for the primary purpose of assisting the recipient organizations in the performance of charitable, religious, or public services and were not expected to result in future customers, such that these discounts were deductible under Sec. 170.

Even absent a direct relationship between the company’s business and the activities of the charitable organization, treating an expenditure as deductible under Sec. 162 could be appropriate when it creates institutional or “goodwill” advertising that keeps the company’s name before the public, provided it is commensurate with the expected benefit the company might receive from future patronage. For example, in Rev. Rul. 72–314, the IRS ruled that contributions given by a stock brokerage corporation to a local charitable organization (whose stated purpose was reducing neighborhood tensions and combating community deterioration) in the neighborhood in which the brokerage’s office was located were deductible under Sec. 162 rather than Sec. 170. Notably, the brokerage advertised to its customers that it was donating 6% of commissions to the organization, which created a “reasonable expectation of the taxpayer that the outlined procedure of payments to the described organization would direct new business to the taxpayer as well as retain the business of its existing customers.”

Added complications arise for taxpayers donating through a private foundation because of the need to consider the potential applicability of the self–dealing rules. In this regard, Sec. 4941(a) imposes a tax on each act of self–dealing between a disqualified person and a private foundation. Acts of self–dealing include the furnishing of goods, services, or facilities between a private foundation and a disqualified person, as well as transfers to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation. However, the self–dealing regulations clarify that if a disqualified person receives an incidental or tenuous benefit from the use by a foundation of its income or assets, this fact will not, by itself, make that use an act of self–dealing (Regs. Sec. 53.4941(d)-2(f)(2)). The regulations further provide that the public recognition a person may receive from donations, potential benefits because the organization is located in the same area as the contributor, or incidental benefits from naming rights in a donated building do not in themselves result in an act of self–dealing because those types of benefits generally are incidental and tenuous (id., Regs. Sec. 53.491(d)-2(f)(9), Example (4)). Thus, when making contributions through a foundation, a sponsor would need to consider whether it is possible to support a position that the contribution results in the requisite benefit needed to support a deduction under Sec. 162 while simultaneously claiming the benefits are incidental and tenuous — and thus do not run afoul of the self–dealing rules.

Next steps

Individuals and businesses should evaluate the timing and frequency of charitable contributions to help reduce the effect of the floor. Businesses should consider whether 2025 taxable income can fully absorb those charitable contributions under pre–OBBBA law to avoid carryforwards. For tax years beginning in 2026, businesses should proactively consider the structure and intent of payments and inventory donations in anticipation of the new deduction limitations.

Editor

Christine M. Turgeon, CPA, is a partner with PwC US Tax LLP, Washington National Tax Services, in New York City.

For additional information about these items, contact Turgeon at christine.turgeon@pwc.com.

Contributors are members of or associated with PwC US Tax LLP.