Tax Reform is Here: Time for Funding Spring Cleaning!
With flowers blooming and birds chirping, spring is a good time to open the windows, dust off the bookshelf, and clean out the clutter that has accumulated over the cold winter. This winter also brought us the new Tax Cuts and Jobs Act, and for nonprofits, it’s a good time to reevaluate your funding strategy. The federal Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, and will impact all types of nonprofits, both directly and indirectly. It is a very complicated bill with multiple changes and outcomes, much of which won’t be understood for some time. Let’s look at a few of the most significant changes and the possible impact for nonprofits.
The TCJA roughly doubles the standard deduction to $12,000 for individuals, $24,000 for couples, and $18,000 for heads of household. The TCJA also raises the limit on cash donations for those who itemize deductions to 60% of adjusted gross income (AGI), which is a 20% increase, and repeals the “Pease Limitation” on itemized deduction limits for upper-income individuals. Though it is true the AGI limitations may be looser for charitable deductions, and eliminating the upper-income limits are helpful, the impact is limited to a few taxpayers who would continue to itemize deductions. Because of the new tax changes, the charitable deduction would be out of reach for more than 87% of taxpayers. A report conducted by the Joint Committee on Taxation predicts that itemized deductions will drop by $95 billion this year. As a result, nonprofits are predicted to lose as much as $13 billion or more each year, and lead to a potential loss of 220,000 to 264,000 nonprofit jobs. The TCJA also limits the amount of state and local income and property taxes that can be deducted from federal taxes to just $10,000. This will pressure state and local governments to enact new taxes and issue spending cuts which could possibly lead to the elimination of some social programs, increasing the burden on nonprofits and other charitable foundations.
The TCJA makes adjustments to the estate tax by doubling the exemption to $11 million for individuals and $22 million for couples. By doubling the exemption, it is estimated to reduce federal revenues by nearly $100 billion over ten years and possibly lower charitable giving by as much as $4 billion per year. The estate tax encourages donors to address future needs in their communities through estate planning and is an important source of revenue for many nonprofits. TCJA also requires unrelated business income tax (UBIT) to be calculated on each trade or business and not aggregated. However, some nonprofits with greater resources would pay a lower UBIT tax rate because the House plan lowers the maximum corporate income tax rate from 35% to 20%. It is possible the changes to UBIT could result in increased taxes on nonprofits which could take away from programs and services if the organization is not prepared for them. Only the first $1,000 of unrelated business income is exempt from taxation, meaning the changes would affect organizations of varying sizes differently.
There are some other changes worth mentioning. TCJA repeals a provision in the tax code that allows the IRS to create an optional tax return that nonprofits can file instead of providing donors with written acknowledgement of contributions. Though this provision is generally unused, it is a necessary measure designed to block the IRS from requiring charities to report donor’s sensitive personal information to confirm charitable contributions. The TCJA also creates a new excise tax on net investment income of nonprofit colleges of 1.4% for assets of at least $500,000 per full-time student. This is an important measure because it possibly represents and invasion of nonprofit independence. Normally, nonprofit trustees have the fiduciary judgement, but this could put it in the hands of elected officials.
The TCJA is very complicated and the future outcomes are not clear, so it is important for nonprofit organizations to best prepare for a number of possible futures. In our experience, most people that make contributions do not do it for the tax benefits, but because they care about the cause. We need to sharpen our efforts to ensure we continue to reach out to these individuals and keep our focus on the lives we change.
To prepare for the possible outcomes—or simply clean house—we have some recommendations for nonprofits to help create more opportunities for the future. For most nonprofits, the key to success is in building strong relationships. It is important to connect your organization’s mission with your donor’s philanthropic goals by engaging in ‘donor-centric’ fundraising. People give to nonprofits for a variety of reasons, not just the tax breaks, and focusing on those motives and other donor interests is a good first step. But donors should not be your only revenue stream. The TCJA cut the corporate tax rate from 35% to 21%. This is a great opportunity to build relationships with corporate partners and create programs with additional giving opportunities. Not only does this create a potential revenue stream, but it is good for their public relations and it broadens your organization’s network. This is also a great time to reevaluate how your organization collects its donor funding. Do you have a planned giving program? Are you set up for automated recurring donations? Instead of asking for bulk sums or annual gifts, you can create a system to accept monthly contributions that spread out the payment, potentially increasing both the amount and frequency of donations. It also has the added benefit of keeping your supporters engaged with your organization.
These are just a few suggestions, but it is important to assess the impact of the TCJA on your specific organization and determine the best plan for your future. The best advice we can offer is: 1) talk to your accountant, and 2) make a plan that includes donor engagement. Need an accountant or help getting started? Contact ABN Director of Capacity Building Elle Benson at (865) 313-2077 or firstname.lastname@example.org.
Open the windows, grab the yellow latex gloves, turn on the radio and get to work. Cleaning house may be a chore but your supporters and the community you serve will be thankful you did!
Other helpful links:
Resources on How the New Federal Tax Law Impacts Charitable Nonprofits
Tax Reform and Charitable Giving for Nonprofits
From Challenges to Opportunities: How Nonprofits Can Make Sense of the New Tax Law