By: Kimberly Fusco
Many not-for-profit organizations will be faced with new challenges as a result of the recent changes in the tax law. In order to properly adapt fundraising and operational needs to address these new challenges, management and board members need to understand these changes and how they will impact the organization.
Changes in the Charitable Giving Landscape
There are several provisions in the new tax law that are expected to change the charitable giving landscape. Here are a few of those provisions:
- The standard deduction for individual taxpayers has nearly doubled, which is expected to reduce the number of individuals itemizing their deductions from 30% to only 5% of taxpayers.
- Limitations on certain deductions, such as state and local taxes and home mortgage interest, will also reduce the number of taxpayers who itemize their deductions.
- The new tax law almost doubles the estate tax exemption. This drastic reduction of the estate tax will decrease the tax incentive in making charitable bequests.
- Individuals are no longer permitted to deduct payments made to a college if such payments entitle the individual to purchase tickets to athletic events or seating rights at a stadium.
What does this mean for your organization’s fundraising? Some experts believe that charitable donations could decrease as much as $20 billion annually as a result of the changes in the tax law. Clearly, these changes alter many of the tax incentives that encourage individual giving and could have a significant impact on your organization’s fundraising efforts. Management and board members need to be discussing the impact on their organization and their strategy to handle these new challenges.
Management and board members will need to consider a few things before navigating the new charitable giving landscape:
- Diversify revenue streams. There are two factors at play: individual giving is expected to decrease and the impact on government funding remains unknown. It is important to plan properly for financial sustainability amidst these changes.
- Spread your message. How can you further convey a compelling message of the organization’s mission and the impact individual donors can have on their community when they make a charitable contribution? Many donors, especially the younger generations, are highly motivated by the impact of their giving.
- Donor stewardship. It is also important to focus on developing stewardship of donors at all levels – from the $10 donors to major gifts. Focus on ways you can make your organization one of their favorite charities.
- Gift strategy. Utilize the new tax law as an opportunity to reach out to your major donors to discuss how the new law will affect their individual charitable giving decisions. Understanding the decision-making process of your specific donors will help management develop a fundraising strategy designed specifically for your organization.
- “Bunched” giving. Consider educating donors no longer itemizing their deductions under the new tax law about “bunched” giving. Under this strategy, individuals bunch two or more years’ worth of charitable giving into one year and therefore their itemized deductions could be greater than the standard deduction for the “bunched” giving tax year. This new concept of giving introduces additional complexities for organizations that rely on a steady stream of annual contributions. It is imperative to discuss with management and board members how your organization will respond to this new strategy in your development plan.
- Their gift their way. Has your organization considered donor-advised funds? This may be a potential response to the “bunched” giving strategy, as it allows the donor to take the tax deduction in the year of giving and permit the gift to be paid out in even amounts annually.
The bottom line: be sure both management and board members have a strong long-term development strategy in place and continue to focus on communicating your organization’s impact rather than tax deductions. These proactive discussions and planning can place your organization in a position to better survive these challenging changes in the landscape of charitable giving.
Unrelated Business Income Tax (UBIT)
Organizations that have unrelated business income will be impacted in several ways. The corporate income tax rate changed to a flat rate of 21%, which is also the new rate for unrelated business income. Unrelated business income tax now will be calculated for each unrelated trade or business and losses from one activity will no longer be permitted to offset income from another activity. For organizations operating more than one unrelated trade or business, they may incur additional costs relating to implementing new accounting procedures to track each activity separately. Net operating losses (NOL) incurred after 2017 can no longer be carried back; however, the 20-year limit on the use of NOL carryforwards is eliminated. In addition, an NOL carryforward may only be used against 80% of taxable income.
Organizations will incur tax penalties on compensation paid to employees in excess of $1,000,000 annually. The organization will be subject to an excise tax of 21% on the amount of compensation over $1,000,000 of the top five highest-paid employees. While this new provision may not affect your organization currently, some analysts view this as a stepping-stone to future increased regulation to limit not-for-profit employee compensation.
It is important to note that the provisions discussed above are only a brief summary of the changes. The changes in the new tax law are extensive and complex. The summary nature of this article prevents us from providing details; therefore, it is important to contact your tax advisor to fully understand these changes and how they will affect your organization.
Kim Fusco, CPA, is a principal in Ellin & Tucker’s not-for-profit services group. She has extensive experience performing high-quality audit, tax and advisory services to numerous not-for-profit organizations and foundations. She is also the chair of the not-for-profit area of the firm’s accounting and auditing technical standards committee. She can be reached at email@example.com.