by Jeffrey A. Kowalczyk, CPA, CFE, CGAPSince its debut nearly a century ago, the charitable deduction has fluctuated with ever-changing tax plans. Now, in the year of its 100th anniversary, the deduction is facing yet another change. An analysis by the nonpartisan Tax Policy Center estimates that one proposed tax plan will reduce charitable giving by as much as nine percent, or $17 billion dollars. While these are just projections, nonprofits should consider how changes in the tax law may impact charitable giving and their organizations. Here are two major threats charitable deductions might face under such a plan.
1. Income Tax Changes
While the proposed plan does not eliminate charitable deductions, it will limit the tax incentive for charitable contributions. Simply put, the proposed plan will reduce the tax bracket. The table below displays what a $100 donation looks like under the current plan versus the proposed plan.
Currently, 25 percent of people who file an income tax return make charitable deductions. Should the new plan pass, less than five percent of people who file an income tax return will be able to make charitable deductions. With the elimination of the 39 percent tax bracket, nonprofits fear that the reduction in after-tax benefits will make donating less appealing.
2. Estate Tax Repeal
Under the current plan, there is a 40 percent tax on everything you own upon death. However, if your net worth is under $11 million dollars you are exempt from the 40 percent tax. High net worth individuals often make a charitable bequest, as these are not subject to estate tax. The elimination of the estate tax under the proposed plan has many organizations concerned that charitable bequests may significantly decrease.
The Flip Side
While there are many studies that have found no correlation between tax law and the motivation to donate, a U.S. Trust Study of High Net Worth Philanthropy found that just 34 percent of participants cited tax benefits as the reason for making charitable gifts. In a separate poll, 73 percent of participants indicated personal satisfaction and making a difference as the main motivation for giving. One could also argue that should the tax plan be approved, the “Tax-Rate Effect” will be offset by the “Income Effect.” By reducing taxes, more disposable income will be available for charitable contributions and ultimately be invested back into the economy.
Under one proposed plan, the business tax rate will be lowered from 35 percent to 15 percent. This could give large corporations more incentive to give to nonprofits. Many corporations leave a substantial amount of money overseas to avoid U.S. tax – if the rate is reduced, corporations will be more inclined to bring their money home. This homecoming means nonprofits could see more activity from large corporations.
Your Position
It is important for nonprofits to remember projections are just projections. No one can say for certain if the proposed plan will pass, and if so, how donors will react to the changes. Either way, nonprofits should be proactive. Below are several tips for positioning your organization for the future.
o Review Financial Statements and Form 990
Most tax-exempt organizations are required to file Form 990, but how many know that this form can be used for much more than IRS compliance and maintaining a tax-exempt status? Nonprofits should recognize that Form 990 is more than just a financial reporting mechanism; it presents the opportunity to engage potential stakeholders by providing a snapshot of an organization’s financial health, governance, and operations – all in one convenient place. Donors will often refer to Form 990 to learn more about your organization and to see if your values align with theirs. Taking advantage of the narrative sections on these forms is an opportunity to tell your story.
o Determine what works
Multiple studies have found that when organizations match donations, giving increased by as much as 20 percent. The amount of the match did not matter!
o …and what doesn’t
When an organization receives funding from other sources, such as government grants, donors are not as motivated to contribute. They are under the impression that the organization can thrive without them.
If passed, the proposed tax law changes will disrupt the current marketplace. The best thing nonprofits can do to prepare include:
o Thinking about their donors – how will the tax law changes affect them?
o Being prepared to make changes to their budgets.
o Making lawmakers aware of how these law changes would impact their ability to fulfill their mission.
o Evolving their fundraising efforts.
We will continue to monitor the proposed tax law changes. The professionals in our office can help you prepare for the uncertain future, call us today.