The Tax Cuts and Jobs Act of 2017 (TCJA) rolls out substantial tax reform for 2018. Tax-exempt nonprofits should understand these changes since they impact an organization’s IRS reporting.
However, there’s a bigger reason nonprofits need to understand these tax reforms: They may impact charitable contributions from individuals. Therefore, some nonprofits may need to revise their fundraising strategy.
Casse L. Tate, CPA and partner of Katz, Sapper & Miller’s Business Advisory Group and Charitable Foundation Services, walks us through three key points of the tax reform that nonprofits should know.
Beginning in 2018, the standard deduction nearly doubles for married couples and single filers. On a purely financial level, this may take away incentive behind some individual giving. Tate explains why.
“Because fewer people will itemize their deductions, thanks to larger automatic standard deduction, some people will get no tax benefit from making a charitable contribution,” she says.
A single filer, for example, would need to itemize more than $12,000 in deductible expenses (including charitables) compared to $6,350 in 2017 just to meet the new standard deduction. For those motivated to make charitable donations to increase deductions and decrease tax liability, some will no longer see that benefit.
Tate frames the impact to corporate donors as an it depends scenario. “If it is a C corporation, there is little change to the treatment of charitables,” she says.
However, the impact shifts for S corporations. “If it is an S corporation or other type of pass-through entity, then the charitables pass through and are taxed at the individual level. As such, they are limited in the same manner as individuals.”
Nonprofits with multiple sources of Unrelated Business Taxable Income (UBTI) will no longer be able to offset gains or losses from one UBTI source with another. Unrelated business income refers to income unrelated to a nonprofit’s mission.
“Say an organization has two streams of unrelated business income,” Tate explains. “One makes $1,000 in the year, one loses $700. The nonprofit has to pay tax on the $1,000, not the net of $300.”
A solution? Tate recommends that nonprofits consider conducting UBTI activities in a for-profit subsidiary. “Corporations are not subject to this rule,” she says. “So using the example above, moving the business lines into a corporation would allow the income to be taxed on $300.”
Nonprofits in this scenario should consult their tax advisor about this strategy because it is fact-specific to each organization’s scenario.
Nonprofits who depend heavily on individual and corporate giving may, understandably, feel apprehensive about TCJA reforms. However, Tate issues a reminder for organizations planning to revisit their fundraising strategy: The feeling of making a difference still motivates most donations.
“Focus on the mission. Focus on the good that will be done with charitable dollars,” she says. “Even if the tax deductible piece isn’t there to drive behavior, people are still motivated to make a difference.”
Want a deeper look at the impact of the Tax Cuts and Jobs Act of 2017? Read “Tax Reform Impact on Tax-Exempt Organizations” on the Katz, Sapper & Miller blog.