For charities, new tax law brings challenges and opportunities
By David J. Manbeck, CPA and Donna M. Mullin, J.D., CPA
Effects of the 2017 Tax Cuts and Jobs Act on nonprofit charities may boil down to a straightforward question: Why do people donate as much as they do?
Some nonprofits are nervous that an increase in the standard deduction may mean a decrease in charitable gifts. If the reason a person donates to a charity is based purely on the tax benefits, this concern may be valid. However, research published in Nonprofit and Voluntary Sector Quarterly shows that the main reason philanthropists give stems from something much more profound – the desire to help others in need.
Changes in the standard deduction
The new tax law increases the standard deduction to $24,000 for married filing jointly, $18,000 for head of household and $12,000 for individuals, but doesn’t allow further write-offs for charitable contributions if you don’t itemize.
Prior to the changes, one in three taxpayers itemized deductions, and some estimates predict the higher standard deduction will mean more than 90 percent of taxpayers will no longer itemize – and will no longer receive an economic perk for their donations.
Other challenges nonprofits may face under the new law include:
- An increase in the estate and gift tax exemption to $11.2 million for individuals and $22.4 million for couples, beginning in 2018, indexed for inflation. Some donors may elect not to incorporate charitable giving into their estate plans because a married couple will be able to transfer twice the individual exemption amount to their heirs, free of federal estate or gift taxes.
- Repeal of the charitable deduction for payments made in exchange for athletic seating rights, previously 80 percent of cost.
The new tax law does expand charitable opportunities for wealthy donors and large estates.
The maximum amount wealthy donors currently can deduct increased from 50 percent to 60 percent of their adjusted gross income (AGI). Additionally, the overall annual limitation on itemized deductions – the Pease Limitation – has been removed through 2025. This limitation had applied to taxpayers with an adjusted growth income (AGI) exceeding $261,500 for single filers and $313,800 for married couples filing jointly.
Change in strategy required
Nonprofits can take steps to lessen financial effects, including:
- Assess how many supporters will stop giving when they no longer see tax benefits. This list is likely to be short but the expense of mailing solicitations and other efforts aimed at these donors may no longer be worth it.
- Make plans to offset any projected financial shortfall, including redoubling efforts to attract donations or donor matching funds from businesses, which are benefiting from a lower corporate tax rate.
- Make a firm budget, outlining expenditures and possible operational savings.
- Monitor and review grants to ensure all funds are used and programs are running as promised.
Perhaps most importantly, nonprofits must make sure donors and the public have a clear understanding of the organization’s crucial work and the positive impact it has on the community.
Some changes in the new tax law also impact the tax obligations faced by nonprofits.
One difference effects income nonprofits receive from sources unrelated to their charitable mission, such as advertising. In calculating the amount of unrelated business income tax (UBIT) owed, organizations can no longer write off losses from some unrelated activities to lower their overall tax liability on those unrelated activities that produce net income.
Now is the time for nonprofits to take a close look at their operations, assess fundraising strategies and determine how the new law may impact their taxes.
A CPA or trusted financial advisor can assist in devising strategies to help donors and nonprofits gain the most benefit from the Tax Cuts and Jobs Act of 2017.
Anyone who works in the nonprofit arena can attest that the reasons people give go beyond the desire for a tax deduction. The real challenge for nonprofits remains the same as it was before the new law: Demonstrate to current and prospective donors how your organization is adding value to society and bettering lives.
David J. Manbeck, CPA and Donna M. Mullin, JD, CPA, are directors with Boyer & Ritter LLC and have extensive experience working with not-for-profit entities. They can be reached at 717-761-7210 or via email at firstname.lastname@example.org or email@example.com