For the past 100 years, U.S. nonprofits have benefitted from the fact that Americans who filed an itemized tax return have been able to take a tax deduction for donations to their favorite charities. However, life changed dramatically for nonprofits on January 1 when the new tax law took effect. Currently, about 35 percent of tax filers itemize their returns, but with the new provisions doubling the standardized deduction, it is estimated that only 5-10 percent of filers will itemize their taxes.
According to the Tax Policy Center, this change in the number of fewer people taking a tax deduction for charitable contributions could equate to up to $20 billion in lost revenue to nonprofits and religious organizations annually. To put that number in perspective, the Independent Sector, a nonprofit membership organization that advances the charitable sector, said the amount in lost revenue to America’s nonprofits would approximate losing all charitable giving in Alaska, Arkansas, Delaware, Hawaii, Idaho, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Mexico, New Hampshire, North Dakota, Rhode Island, South Dakota, Vermont, West Virginia, Wyoming combined. I’ve read some estimates that report this reduction in contributions could result in the loss of up to 260,000 nonprofit jobs. And that translates into cuts to programs that enhance our communities’ quality of life for people of all ages and all income levels.
There are two other changes in the tax law that could impact local nonprofits. First, the new tax law is expected to result in a decline in bequests to charitable organizations because of the increases in the thresholds to qualify for the estate tax. Second, any nonprofits that generate unrelated business income, such as renting out their facility for weddings, renting out their mailing lists, or conducting purely recreational travel tours, will have to calculate the amount of unrelated business income they generate separately by line of business instead of being able to aggregate all total unrelated business expenses. This change means charities will no longer be able to offset gains in one line of business for losses in another. Changes related to highly compensated individuals and university endowments are also part of the law, but they won’t impact Sonoma Valley nonprofits.
The big question is now that we know about the potential losses, what can nonprofits do about it? To start, it’s important for nonprofit leaders to remember that the primary reason people give to nonprofits isn’t for the tax deduction. While the tax write-off may be the driving force for some, it isn’t what motivates most people to give. People give, and will continue to give, to organizations with missions aligned with donors’ values and passions and with leadership and practices that donors trust.
Since it’s likely that 30 million fewer Americans will itemize their tax returns in 2018, the traditional year-end appeal will most likely yield fewer dollars. So, nonprofits may want to develop a strategy for launching a robust year-round appeal and not wait for the bulk of donations to arrive in December of each year. Perhaps the strategy could include encouraging donors to request that in lieu of birthday or holiday gifts, friends and relatives could donate to a specific nonprofit or asking people to stop sending thank you notes or emails and instead send a donation to the charity of choice of the person being thanked. Creating new partnerships through co-branding opportunities with businesses that have values aligned with a nonprofit’s values could be another source of new revenue for local charities.
A way to increase giving from older donors could be through the charitable Individual Retirement Account (IRA) rollover that became a permanent part of the tax law in 2016. Most seniors don’t itemize their tax returns, but all individuals over 70.5 years old must take required minimum distributions from their traditional IRAs. And IRA-holders can direct that part of this required minimum distribution go directly from their IRA to a public charity as non-taxable income. The maximum that any individual can roll over to a nonprofit in a year is $100,000, but smaller donations to a variety of nonprofits per year are allowed. The Association of Fundraising Professionals advises nonprofit leaders to remember that individuals of any age can donate appreciated investments and take a deduction for the full market value (with some limitations) and avoid having to pay capital gains on the appreciation.
One positive change in the tax law impacts individuals who already donate a large percentage of their income to charity. Under the new law, individuals may now deduct contributions to charities and donor-advised funds in an amount equal to 60 percent of their adjusted gross income, up from 50 percent. In addition, nonprofits are no longer required to provide a written acknowledgement of donations of $250 or more. Instead, nonprofits can opt to file a document with the IRS that provides information about the gift amount and the donor. However, it would be wise for nonprofits to continue to thank their donors who give at all levels. Another upside is that nonprofits that have unrelated business income will only have to pay tax on income at a 21 percent rate instead of at the current 35 percent rate.
To truly understand the implications of the new tax legislation, nonprofit leaders should meet with their tax advisors sooner rather than later so they know exactly what they can expect in 2018. One thing we can all expect is that it won’t be business as usual in the philanthropic world and that nonprofit leaders will really need to step up their game to maintain current revenue levels.
B.J. Bischoff is the owner of Bischoff Performance Improvement Consulting, a Sonoma firm specializing in building the capacity of nonprofit organizations and public sector agencies. She assists her clients with strategic planning, board and staff training, fund development, grant writing, and community relations. She is Past President of Impact100 Sonoma and serves as a Sonoma County Board of Supervisors’ appointee to the Sonoma County Portfolio of Model Upstream Programs Review Committee. Contact her at [email protected]