April 10, 2019
How will tax reform impact your not-for-profit?
There are many changes within the TCJA, but by far, those that will impact NFPs the most include:
- Standard deductions have nearly doubled from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.
- The charitable contribution deduction limit rose from 50% to 60% of individual adjusted gross income.
- The corporate tax rate was lowered from 35% to 21% – 4% lower than the global average corporate tax rate.
- The estate tax exemption was doubled from $5 million to $10 million (adjusted for inflation) per individual beginning in 2018.
Standard deduction increase.Of all the changes in the TCJA, the increase to standard deductions will by far have the greatest impact on NFPs – especially with small to mid-size organizations and religious entities.
Why? Because for many middle-income earners, a standard deduction of $12,000 ($24,000 for married couples) will provide a greater reduction in adjusted gross income than itemized deductions such as charitable donations. In short, millions of tax filers no longer have a tax-based incentive to donate and may choose to use that money for other things.
The effect of this change on NFPs could be severe. While we won’t know actual numbers until the end of 2019, the Tax Policy Center estimates that charitable giving will decline by $12.3 billion to $19.7 billion1. Some charitable organization are bracing for a reduction in donations by as much as 25%.
Estate tax reduction.Another hit to charitable contributions is the TCJA’s increase in estate tax exemptions which also reduces the incentive for charitable bequests, as more property can now be transferred to beneficiaries tax-free.
Corporate tax rate.Finally, the lowering of the corporate tax rate means companies have less of a need for deductions to reduce reported profits and thus less incentive to give. Optimists hope, however, that companies will defer some of this extra profit toward charitable endeavors. Time will tell.
Charitable contribution deduction limit.One bright spot for not-for-profits lies in the increase to the charitable contribution deduction limit from 50% to 60% of adjusted gross income. Indeed, while middle-class wage earners may have lost an incentive to give, high-income earners, whose itemized deductions still surpass the new standard deduction, may now claim more of their donations as a charitable deduction.
What can NFPs do?NFPs should do everything in their power to make donating as easy and convenient as possible. This includes offering donors the ability to contribute by credit card or directly from their bank accounts. These tools are a proven way to maximize donor contributions and may help NFPs soften the blow of this new tax landscape.
Recurring donations can also be set up to help reduce fluctuations in giving. They’re especially helpful for religious entities that may experience reduced attendance (and subsequent giving) during summer months when families are traveling more.
Privately placed tax-exempt bonds.Finally, regardless of the current tax environment, many manufacturers, municipalities and 501(c)3 organizations have found privately placed tax-exempt financing an innovative way to finance projects. This type of funding can be used to construct or acquire new buildings, remove or relocate existing structures, purchase or lease new machinery or equipment and pay for a portion of the fees incurred during the process.
There are a several reasons this financing option may make sense for your organization:
- No letter of credit is needed, which eliminates the need for an official statement.
- Competitive interest rates can potentially save you thousands of dollars.
- Placement fees and legal fees are typically lower than traditional bond transactions.
- There are no remarketing fees.
- There is no requirement for a reserve fund to be set aside, reducing the size of overall issuance.
- “21 Million Taxpayers Will Stop Taking the Charitable Deduction Under The TCJA,” TaxPolicyCenter.org, 1/8/2018, www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja