The new, complex tax overhaul bill will have a specific and significant impact on nonprofits. Tax reform was shaping up to change not just the finances, fundraising and operations of nonprofits, but our entire identity was challenged through the unsuccessful attempt to repeal the Johnson amendment.
So what do nonprofit leaders have to know?
There are some changes that didn’t make it into the final bill. Attempts to eliminate private activity bonds (used by nonprofits to finance large projects), to impose an excise tax on tax-exempt organizations and to include payout requirements for donor-advised funds, didn’t make it into the reconciled bill. However, donors may be increasingly likely to establish donor-advised funds by “bunching” several years worth of donations into one year and nonprofits should educate themselves about these vehicles, which have pros and cons. Nor will the bill force museums to become private foundations. The bill also did not increase the volunteer mileage reimbursement rate.
Nonetheless, here are some provisions of the bill that didn’t make headlines, but that every nonprofit will have to understand.
Some nonprofits will be taxed and see program funding cuts
At first glance, it would seem that only private university endowments would be affected by one particular provision in the bill that taxes them. However, this is part of a cultural shift from seeing nonprofits as tax-exempt entities to seeing them as taxable. The bill also taxes nonprofits’ unrelated business income taxes in each instance – not just through net income after aggregating all revenue and costs as its currently done. Unrelated business income is taxed at the new corporate tax rate, which is lower and may mitigate the expenses of the change. The bill also imposes a 21 percent excise tax on covered nonprofit employees salary of $1 million or more. The nonprofit, not the employee, must pay the tax.
Most of us also have a sense that this bill is going to result in funding cuts. The bill itself does contain some automatic funding to balance the $1.5 trillion addition to the deficit. The reductions to some programs are automatic, such as Medicare, the U.S. Crime Victims Fund and the Supplemental Nutrition Assistance Program, and other social services programs would likely be targeted for cuts that may become necessary to reduce future deficits. These cuts will impact New York nonprofits as the state and New York City are forced to cut programs partially funded with federal dollars, or to move dollars from one program to another.
Contrary to what President Donald Trump said, the Affordable Care Act has not been repealed. However, the tax bill did eliminate, beginning in 2019, the penalty for not complying with the individual health insurance mandate. This likely means that health insurance costs will rise for nonprofits – and for many others. This will not only put our employees, clients and communities at risk, but it will also increase the demand for nonprofits to address the needs that increase as access to health insurance decreases.
The bill also may affect the low-income housing tax credits, which are state and local government tax credits for corporate investments in affordable housing. With a lowered corporate tax rate from 35 percent to 21 percent, corporations may not need as many tax credits. Estimates show that this could cost the state $2 billion over 10 years.
Here’s how charitable giving will decrease
Some of the more common provisions are better known, but still deserve attention. Most nonprofits have seen this tax reform bill as a threat to our ability to raise funds, and the bill’s standard deduction increase may have a chilling effect on donations: When the standard deduction is high, fewer people itemize, which is where charitable deductions get credited. To be clear – charitable giving is still tax deductible. It’s just that fewer people will be itemizing to deduct these gifts. (Estimates suggest 95 percent of those who now itemize will no longer do so under the new bill, because of this provision and modifications to the state and local tax deductions.) It is true that many people give because they want to support our organizations, not for the tax deduction, and this may not affect their giving at all. Also, there is a provision that actually makes it easier to give – increasing the limit for cash donations for those who do itemize in future years from 50 percent to 60 percent of adjusted gross income; however, this is likely to affect only about 5 percent of donors because very few people give away 50 percent of their income. Overall, it would serve nonprofits well to revisit any solicitation language that relies on the benefit of tax deductions. We need to speak to donors’ hearts, not their wallets.
The incentive to itemize could also drop because the new bill limits deductions of state and local income taxes to $10,000, as state Attorney General Eric Schneiderman recently wrote.
Donations may also be reduced because of the change to the estate tax. While the tax remains, the exemption to the tax increased significantly. This could mean that bequests and other charitable giving through an estate, which can reduce tax burdens, may decrease as the tax burden does.
What do nonprofits do now?
First, contact a tax attorney to get real legal advice to figure out your organization’s employee payroll deductions, which must begin under the new bill on Jan. 1. Everyone is scrambling to figure this out – so consult your financial experts now. Look out for the IRS emergency regulations that will be prepared in the very near future. New York state and New York City may also issue emergency regulations. Nonprofits need to be prepared to advocate against payments in lieu of taxes for nonprofits – a popular way to try to raise revenue from untaxed nonprofits in times of economic distress. If your organization has unrelated business income, consider whether you need to restructure part of the business into a for-profit entity. Contact a tax attorney to see which provisions of the bill may impact your organization. Engaging in risk management now, and incorporating information as it becomes available, can help to strengthen a nonprofit’s ability to weather these changes.
Is there any good news? Well, remember, this bill does not eliminate charitable giving, it just makes it less of a tax advantage to give. People will still give. And, for nonprofit employees, the child tax credit and credit for nondependent children might help increase overall income. The bill does eliminate the alternative gift substantiation option that had allowed the IRS to collect donor social security numbers as a part of one type of reporting on donors. But all in all, this bill is going to be tough for our sector.
Sharon Stapel is president of the Nonprofit Coordinating Committee of New York.