By D. Adam Anderson, AttorneyThis article originally appeared in the October 3, 2018 edition of the Cascade Business News.
The Tax Cuts and Jobs Act of 2017 (“TCJA,” generally effective January 1, 2018) brings many well-publicized and wide-ranging changes for federal taxpayers. Less discussed is the significant impact the TCJA will have on the nonprofit sector. At least until much of the TCJA sunsets in 2025 (if not otherwise extended by Congress), tax-exempt, nonprofit entities will need to consider long-term strategies to protect previously expected revenue streams.
Most significantly, changes made to the individual income tax code by the TCJA may greatly reduce tax deductible charitable contributions, the life blood of many nonprofit entities. Starting in the 2018 tax year, the TCJA ends personal exemptions, but greatly increases the standard deduction for individuals and joint filers. The higher standard deduction will decrease the number of taxpayers who need to take itemized below-the-line deductions, including the Section 170 deduction for charitable gifts. The long-term impact of this on the nonprofit sector remains to be seen, but estimates from the Tax Policy Center, for instance, project that 90 to 95 percent of all filers will now have no need to itemize, potentially translating into a $12-$20 billion dollar reduction in overall charitable giving.
Further, the doubling by the TCJA of the existing $5.6 million base estate tax exemption should similarly reduce charitable bequests. A recent report of the Congressional Budget Office regarding the impact of a proposed wholesale repeal of the federal estate tax estimated a 28 percent reduction in charitable bequests. Though the estate tax was not ultimately repealed by the TCJA, the now $11.2 million base exemption (in reality, upwards of $22 million for married couples) puts the need for tax-motivated charitable philanthropy out of mind for all but the wealthiest of taxpayers.
While tax incentives are not necessarily the sole motivation behind charitable giving, charities and nonprofits should nevertheless be bracing for reduced revenues and collateral impacts. Aside from lost program revenues, a study by George Washington University projected a loss of at least 220,000 nonprofit sector jobs due to the TCJA. Charitable nonprofits with Section 501(c)(3) status should also be sensitive to the fact that reductions in public donations (when compared proportionally to other annual revenue streams) may trigger reclassification by the IRS from a “public charity” to a “private foundation.” Such entities should already be well acquainted with the fact that “public charity” status is generally preferable from a donor and tax compliance perspective.
The TCJA also brings a number of other changes specific to nonprofit entities. Among them:
- Several formerly tax-free fringe benefits to employees relating to transportation, parking, and use of on-site athletic facilities have been eliminated. Nonprofits providing such benefits will have to either include the cost of such benefits as taxable income on an employee’s W-2, or else include the cost as taxable “unrelated business income” (“UBI”) to the entity.
- Profits and losses from multiple taxable unrelated business activities may no longer be pooled to offset otherwise taxable UBI. Each activity must be considered separately, with unused losses carried forward.
- Finally, the TCJA imposes a 21 percent excise tax upon nonprofits paying $1 million or more in compensation to any of their top five highest-paid employees.
One of the stated goals of the TCJA was to simplify the tax code, ending many deductions, but lowering overall rates. Such changes, however beneficial they may prove to individual taxpayers, are likely to have significant, unintended consequences on the nonprofit sector.
D. Adam Anderson is a business law attorney at Jordan Ramis PC. Contact him at (503) 598-7070 or firstname.lastname@example.org.