Posted by Jonathan Moll, CPA and Jane Gringolts
Many people think that nonprofit organizations (NPOs) are immune to changes in regulations affecting income tax. However, NPO board members and those of us that work closely with organizations in the industry understand this is a common misconception. In fact, having been bestowed the benefit of tax exemption, NPOs operate under the constant watchful eye of the IRS and changes to the Internal Revenue Code often have direct and/or indirect effects on them. The following highlights the potential significant effects on NPOs of the Tax Cuts and Jobs Act of 2017 (TCJA) that was signed into law on December 22, 2017.
How will the TCJA affect charitable giving?
Whether charities will suffer a decline in personal giving from TCJA is the primary discussion amongst colleagues within the industry. On the surface, the TCJA benefits NPOs because the deductible limit for charitable contributions was increased from 50% of adjusted gross income (AGI) to 60%. This means that high net worth individuals that donate a significant portion of their annual income to charities may receive a potentially larger benefit from donating even more.
However, taxpayers benefit from charitable giving only if they itemize their personal deductions in lieu of the standard deduction. Evidence suggests that a significantly higher portion of taxpayers that itemize their deductions donate to charities compared to those that do not itemize their deductions. Currently, approximately 30% of taxpayers itemize their personal deductions. Taxpayers generally itemize deductions only when their personal allowable deductions exceed the standard deduction threshold. The TCJA almost doubles the standard deduction level from $6,350 to $12,000 for single taxpayers and from $12,700 to $24,000 for married filing jointly taxpayers. Because of this, it is anticipated that the percentage of taxpayers that itemize their deductions will decrease significantly, with some studies predicting a decline from 30% to almost 5%. As a result, fewer people will receive a tax benefit from their charitable giving.
Another aspect of TCJA that will potentially effect charitable giving is doubling the estate tax threshold to $11 million ($22 million for married filing jointly). Many wealthy donors leave charitable bequests as a method to avoid or reduce estate taxes. The increased threshold reduces the effectiveness of charitable bequests as a tax avoidance strategy for estates with values between the old and new thresholds.
Will the increased standard deduction threshold disincentive donors from giving? Will the increased AGI charitable contribution threshold incentivize high-net-worth donors to give more? Optimistic NPOs believe the effectiveness of their programs and their donors commitment to the communities will trump the effect of TCJA on donations, but only time will tell.
Other provisions of TCJA that have a direct, but likely less broad-based effect on NPOs are as follows:
- The establishment of an excise tax on net investment income for private colleges and universities with at least 500 students and investment assets valued at more than $500,000 per student.
- NPOS with multiple unrelated businesses can no longer deduct the losses of one unrelated business unit from the profits of another to determine unrelated business income tax (UBIT).
- A decrease in corporate income tax rates from 35% to 21% will affect those organizations subject to UBIT.
- Assets from Section 529 Plans will be available for elementary and secondary tuition. This could have a positive effect on enrollment levels and the financial sustainability of many nonprofit independent schools.
As always, if you are unsure of the effect of the TCJA on your organization, consult your accounting professional.