How Tax Reform Could Impact Non-Profits

The recent tax reform created changes relating to charitable giving for both individuals and entities. As a non-profit what does that mean for you? The below summary will help you understand how the tax law changes relate to charitable giving and how you can prepare. 

Individual Income Tax

1. The tax rates have generally decreased for all individuals. The maximum individual tax rate decreased from 39.6% to 37%.
2. The standard deduction has increased from $12,700 to $24,000 for married couples.
3. Personal exemptions were eliminated.
4. PEASE limitation was eliminated.
5. The allowable deduction for cash donations made to public charities increased from 50% of AGI to 60% of AGI.
6. Donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.

Estate Tax

1. Estate tax exemption doubled to $11.2 million for 2018, indexed for inflation. Therefore, married couples have an exemption of $22.4 million.

Entities

1. C corporations are taxed at a flat rate of 21%. This has decreased substantially from the maximum rate of 35%. 
2. Business owners (sole proprietorships, S corporation stockholders, partners in partnership, etc.) may be eligible for a 20% deduction against business income. This deduction phases out for married taxpayers earning more than $315,000.  In addition, certain personal service businesses such as CPAs, attorneys, doctors, etc. are not eligible for the deduction, unless they are below the phase out threshold.   There are additional limitations based on W-2 wages and cost of business assets. 

What does this mean?  The impact Tax Reform will have on nonprofits is debated.

Negative Impact

• This increase, coupled with the cap of the state and local tax deduction of $10,000, means far fewer taxpayers will itemize their deductions.
• Before tax reform, approximately 30% of taxpayers itemized their deductions. Now it is anticipated fewer than 5% of taxpayers will itemize. 
• Many non-profits fear charitable giving will decrease since it will not benefit many donors for income tax purposes.
• National Tax Policy Center estimates charitable giving nationally will decline by between $12 and $20 billion in 2018, or between 4% and 6.5% as a result of the tax law changes.
• National Tax Policy Center estimates that philanthropic bequests will decrease by between 15% and 30% nationally, or $4 billion.
• Could be a difficult situation as government subsidies and services also decline.

Positive Impact

• “The tax deduction is not the main reason that people give. People in America are just generous. They want to give back. We have this tradition of philanthropy in the United States. Those are the reasons,” said Steve Taylor, senior vice president and counsel for public policy at United Way. “What the tax deductions do is they enable people to give more.”
• Although the tax benefit may decrease, individuals and corporations will have more cash overall to give.
  • For non-itemizers, the standard deduction doubles, giving more cash. Small to mid-size donors will have more disposable income.  These individuals were never giving for the income tax benefits.
  • For itemizers, the deduction increases from 50% to 60%, and the PEASE limitation goes away, giving them more money to give. The majority of itemizers are upper-middle-class individuals and aren’t trying to reach a charitable deduction advantage.  They give from the heart.  Their charitable tax deduction is now even higher.
  • Corporate rates are reduced to 21%.
    • Corporations will hire more “non-itemizers” whose increased disposable income can be shared with nonprofits.
    • Corporations will hire more “itemizers” who will use their increased tax deduction to fund important causes.
    • Corporations will have more “Marketing Dollars” to invest in charity (100% write-off)
    • Corporations will have more “charitable dollars” to invest in charity (50% write-off)
  • Boeing declared they would spend $300 million on “employee-related and charitable investments because of the tax law.
  • Wells Fargo announced they would increase donations to nonprofits and community organizations in excess of $400 million in 2018.

What can you do?

• Prepare for a reduction in contributions.  It is likely donors will still give, but the amounts may be lower.
• Prepare for “bunching” of charitable deductions and its impact on your cash flow

Assume a married couple has $6,000 of mortgage interest and is capped at $10,000 of deductions for their state and local income taxes and property taxes.  With the new standard deduction level at $24,000, this couple would receive no tax savings from the first $8,000 of charitable contributions.

If a couple gives $10,000 annually to charity by bunching their donations in alternate years, they would claim the standard deduction in one year, and itemize their deductions in the alternative year.

Over the two year period, the couple generates an additional $8,000 in tax deductions.  If the couple falls in the 32% tax bracket (with taxable income over $157,500), bunching would provide a permanent tax savings of $2,560.

• Advertise the use of Donor Advised Funds

A vehicle that makes it easy for taxpayers to bunch their charitable donations is a donor advised fund (DAF).  The taxpayer is able to claim the charitable tax deduction in the year of funding the DAF, and can make grant requests to the desired charities over one or more years.  The couple in the example would donate $20,000 in year one, but spread the actual grants made to charities over a two year period.  The tax savings is further compounded if the couple contributes appreciated long term capital gain property to the DAF by purging the inherent gain tin the contributed property.   

• Advertise the use of Qualified Charitable Distribution. These will become even more beneficial than before.
• Focus on the intangible benefits of giving and the good donors are doing for our communities. Once the dust settles, donors will likely still give, even without the same benefits for tax purposes.

If you have questions about how tax reform might impact your charitable giving, please contact our Estate Planning group at 316-267-2000.