Special to the Philanthropy Journal
By Marc Berger
For many nonprofits, the first few months of the year begins with several core activities—including annual budget and program planning and the tabulation of last year’s total giving. This can be an equally exciting and nerve-wracking time, depending on each organization’s expectations and results. Those that made significant year-end fundraising pushes, especially, will be keen to see if their efforts paid off or fell short.
Nevertheless, 2019 brings its own reasons for caution: It signifies tax reform’s one-year anniversary. Marking the largest overhaul of U.S. tax policy in decades, the bill known as the Tax Cuts and Jobs Act was signed into law in December 2017, introducing several tax code changes that impacted nonprofits and their donors. While it’s still too early to tell exactly how tax reform has impacted 2018 giving, its impact on the annual amount of donations received continues to resonate deeply among organizations.
How can nonprofits that experienced a dip in giving last year respond? And how can those that haven’t yet—but fear they may still—prepare? First, organizations must understand which tax provisions are behind the effect, and then take steps to mitigate them.
Top 3 Tax Reform Provisions Impacting Charitable Giving
While there are many provisions that impact nonprofits in general, the top three that impact charitable giving specifically include:
- Doubling of the Standard Deduction: While the act’s near doubling of the standard deduction (from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples filing jointly) may have benefited taxpayers, it likely has also led fewer individuals to itemize, consequently reducing overall giving. Whereas approximately 30 percent of Americans itemized before tax reform, according to the Tax Foundation, the Council on Foundations had predicted that the percentage may be 5 to 12.5 percent fewer due to the changes. The Tax Policy Center further estimated that 2018 may see a decline in charitable giving by $12.3 to $19.7 billion.
Nevertheless, not all nonprofits are necessarily affected equally by tax reform. Organizations that typically rely on smaller donations from middle-income donors—such as social service organizations, places of worship, and more—may experience a greater dip in charitable giving, as taxpayers choose to take the standard deduction over itemizing. On the flip side, those that tend to draw larger, high-income donors—such as universities, hospitals, and museums, among others—are less likely to feel as strong an impact, since, depending on the size of the donation, donors may still be incentivized to itemize their deductions.
Donors who choose to give the same amount may instead pursue a different giving strategy. Rather than giving a series of smaller gifts over a period of several years, for example, a donor may choose to bunch his or her gift in one year to maximize the tax benefit. Other donors may decide to change the vehicle in which they give.
- Increase of the Charitable Contribution Deduction Limit: Not all of the provisions in the act lead to a dip in giving; in fact, some are meant to encourage donors to give more to charity. One provision increased the charitable contribution deduction limit for an individual from 50 to 60 percent of his or her adjusted gross income (AGI) for cash donations to public charities. Under this provision, high-income donors can claim more of their donations as a charitable deduction.
- Repeal of the “Pease” limitation: The “Pease” limitation increases the taxable income for high-income earners by reducing the benefits of several itemized deductions, including charitable contributions, once AGI reaches a certain amount ($261,500 for single filers and $313,800 for married couples filing jointly). The act’s suspension of this limitation gives wealthy donors another incentive to donate more to charity, now that the tax benefit from their itemized charitable contributions is no longer decreased. While this repeal sunsets in 2025, it may help offset some of the anticipated dip in giving from the other provisions.
How Nonprofits Can Mitigate the Impact
How can nonprofits mitigate tax reform’s effect on their charitable giving in 2019?
Here are three steps your organization can take:
- Assess the impact. How significantly has tax reform impacted your fundraising to date? Before you can mitigate tax reform’s repercussions, you must first understand its full impact. To do this, you should assemble a team of accounting, finance, fundraising, and donor relations professionals to dig into the data and compute how much tax reform has actually impacted your bottom line and what you can expect moving forward. It’s crucial to also involve your external tax advisors to help you navigate tax reform’s ripple effects—effects that may extend beyond a decrease in donations.
- Continue to cultivate your donor base. Regardless of the fallout, it’s important to remember that while tax deductions do form a strong incentive for giving, it is by no means the only (or even primary) reason. In fact, only 17 percent of wealthy donors say they are always motivated to give by tax benefits, according to the 2018 U.S. Trust Study of High-Net-Worth Philanthropy. While this percentage may differ for middle-income givers, the fact remains that your mission still plays a critical role in why your donors chose you as the recipient of their gifts. Thus, continuing to cultivate your donor base—including regular and prospective donors—remains an imperative. This is where using technology, such as predictive analytics, can come into play. By helping your nonprofit identify the people who are most and least likely to donate, predictive analytics can help you sharpen your targets and optimize your fundraising efforts.
- Establish your priorities. Regardless of whether funding to your organization dwindled last year, you must still learn to prioritize the dollars received, and to focus on the areas that will have the greatest impact on your organization. As BDO’s 2018 Nonprofit Benchmarking Survey revealed, nonprofits currently spend an average of 77 percent of their total expenditures on program-related activities. About 1 in 5 (19 percent) spend between 90 to 99 percent on program-related expenses. While this relatively high programmatic spending may sound ideal, it could also mean that your organization is underfunding necessary infrastructure—such as new technology, employee training, and fundraising expenses—a phenomenon known as “the starvation cycle.” Unless your donations are restricted, you should prioritize the areas most critical for your organization’s long-term sustainability—whether it’s internal operations or external programming.
How greatly tax reform will impact charitable giving remains to be seen. Nevertheless, while some changes have led certain organizations to reap lower-than-normal annual giving amounts in 2018, the upside is that it has also prompted many others to turn a new eye toward their operations, financial management, and tax planning strategies. Tax reform, in other words, was a wake-up call that led many to reassess their status quo and look for new ways to grow.
For long-term success and sustainability, we often advise nonprofits to adopt what we call a “Nonprofit Heart, Business Mindset.” This mindset—which requires nonprofits to maintain financial and operational excellence without losing sight of their mission—is crucial to continued growth. Taking this stance will not only help organizations navigate the ripple effects of tax reform, but pivot through all the changes in 2019 and beyond.
Marc Berger, the National Director of BDO’s Nonprofit Tax Services, has more than 25 years of experience in both public and private tax practice, including large accounting firms, complex healthcare organizations, the U.S. Tax Court, and practicing law. Marc has advised a diverse group of organizations such as hospitals and healthcare organizations, colleges and universities, charities and foundations, and other tax-exempt organizations.
Marc’s experience in the nonprofit tax area includes applications for exemption, protection of tax-exempt status, private inurement and excess benefit transactions, unrelated business income and allocation of expenses, joint ventures with for-profit entities, mergers and acquisitions, tax-exempt bond compliance, compensation arrangements, Internal Revenue Services (IRS) and state audits, state and local tax exemptions, and Forms 990 and 990-T compliance.