The recent changes to our Tax Code (officially, the Tax Cuts and Jobs Act) will affect many nonprofits.
The changes receiving the most criticism concern the significant increase in the amount of the Standard Deduction and the related changes to deductions for state and local property/real estate/sales taxes. Thus, only a small minority will itemize their deductions. For most nonprofits who do not enjoy the largesse of the ultra-wealthy, this means the nonprofits will need to modify their solicitation strategies. Since “you can deduct it” will no longer induce as many donors, nonprofits will spend more effort highlighting their value and engaging in more personalized donation appeals.
Though a vocal contingency believes the new tax law will lead to reduced giving, I am not convinced. Most donors give because they want to and not for the deduction. There may be reduced contributions or “bunched’ donations by net worth donors but I do not anticipate the average community nonprofit will experience reduced donations due to this tax law provision.
As a consolation, the new law increases the value of the deduction for those donors who do itemize, increasing from 50% to 60% of the donor’s Adjusted Gross Income with carryover of the excess contributions.
Many nonprofits pursue a legacy planning donation strategy. Many worry the doubling of the estate and gift tax thresholds may also limit donations. Again, I am skeptical of this argument as most donors do not even meet the old $5 million threshold. Thus, the impact will be limited to the nonprofits who enjoy the largesse of the ultra-wealthy. The average community nonprofit should not be affected.
Unrelated Business Income (UBI)
The law may increase the unrelated business income tax (UBIT) for nonprofits. Previously, nonprofits operating more than one unrelated business could deduct losses from one business from the profits of another business. Now, UBI is calculated individually for each activity; losses from one activity cannot offset profits from another.
In addition, UBI will include expenses paid or incurred for popular transportation fringe benefits (such as commuter transportation, transit passes, qualified parking and qualified bicycle commuting reimbursement).
Excess Compensation Excise Tax
The new excise tax on highly compensated employees will affect many large nonprofits. Now, nonprofits will pay a 21% excise tax on compensation in excess of $1 million paid to the five highest compensated employees (subject to some exceptions).
So, yes, the new law will affect nonprofits. Instead of complaining, the proactive nonprofit will modify its donation appeals and business practices to limit the law's effect.
Christine Jarzab Kuntz is an attorney specializing in the life cycle of businesses and nonprofit organizations. She is enthusiastic to share her knowledge, tools, and tips with the business and nonprofit community. She enjoys the excitement of tutoring start-ups, tackling the challenges of established businesses, and counseling her clients' transitions through all stages of the business life cycle.