LaPorte Tax Director Bruce Prendergast partnered with New Orleans CityBusiness to author an article on the effect of the 2017 Tax Cuts and Jobs Act on nonprofit organizations. Bruce is a member of the LaPorte Nonprofit Industry Group and has extensive experience in all aspects of nonprofit, individual, corporate and partnership tax compliance and planning. The article in its entirety can be found below.
Charitable giving in an evolving environment
Depending which headline you read, the 2017 Tax Cuts and Jobs Act (TCJA) has been predicted to cut charitable giving by anywhere from $13.1 billion to $19B. In 2018 individual giving fell 3.4% from 2017, when adjusted for inflation according to Giving USA. For nonprofits trying to figure out future impacts, uncertainty is the only thing they can depend on right now. Rather than worrying about how trends at the macro level will affect fundraising, the focus now should be on developing a strategy to navigate uncertainty.
IMPACT ON DONORS
For many taxpayers, the TCJA eliminates the tax deduction as an incentive to donate. Multiple TCJA provisions combine to make charitable contributions less financially attractive to taxpayers.
To begin with, the TCJA increases the number of taxpayers who should take the standard deduction. For example, if you are married filing jointly, your standard deduction has almost doubled from $12,700 in 2017 to $24,400 in 2019. At the same time, the TCJA has also limited or removed certain itemized deductions significantly. The limitation that will impact the most taxpayers, especially those in high-tax states, is the $10,000 cap on deducting state and local taxes. This cap, along with changes to and eliminations of other deductions, makes the standard deduction a better choice for many (Figure 1).
All these changes mean that the TCJA has decreased from 30% to 10% (estimated) the number of people who are itemizing. As a result, the number of taxpayers who included a charitable deduction on their taxes dropped from 24% in 2017 to 8.5% in 2018. Many upper-middle and middle-class people can no longer save on taxes through donations. Losing this deduction makes each dollar a donor gives more expensive. If your marginal tax rate is 30%, a $2,000 donation which previously cost you $1,400 will now cost you $2,000. Nonprofits are concerned about how much this change will lower overall giving.
If your donations no longer lower your taxes, consider strategies which may let you still receive a tax benefit for your giving. Consider bunching your donations. Rather than give a little each year, save your contributions for a few years and then donate the larger amount when it grows large enough to lower your tax burden. Also, if you are 70 ½ or older, you can transfer up to $100,000 yearly in IRA withdrawals directly to nonprofits without considering the amount as income. Lastly, some higher-wealth individuals are switching from contributing directly to nonprofits to creating Donor-Advised Funds (DAFs). These funds let you deduct large donations in the same year you make them. The fund then grows tax-free. The resulting money can be granted to almost any IRS-qualified public charity at any time over the life of the fund.
IMPACT ON NONPROFITS
Although it will likely take a few more years to measure the full effect of the TCJA on nonprofit donations, initial numbers indicate individual contributions are shrinking. As anticipated, it appears that fewer donations are coming from taxpayers who have stopped itemizing, as now their donations may not result in tax savings. Most nonprofits cannot trim more from their budgets than they already have, so focusing on making fundraising more effective may be the best way to cope with this change.
If your organization is facing shrinking contributions, the first step you should take is to profile your donor base. Donor profiles should describe characteristics of persons who have donated or are likely to donate to your nonprofit. A typical donor profile includes attributes such as age, location, income, giving history, assets, political affiliations, and donation history. Donor profiles let you assess your risk exposure, communicate better with different donor types, and find additional donors. You can then match your donors to their preferred type of message. For example, direct mail might work best with retirees, while social media is likely a better vehicle for millennials. You can also use this information to make better use of your limited fundraising budget.
Also, take a hard look at how well your messaging reflects the value of a donation. How does a contribution improve life for an individual or a community? Does the donation bring you closer to your target results for the year? How does a donation help achieve the central goal of your mission? Remember that stories are a powerful tool you can use. Examine your messages to ensure that the story of the individual donation is front and center.
As the tax code continues to change, evaluate the effectiveness of your existing fundraising strategies and build on those that have succeeded. Seek champions among existing donors and ask them what strategies appeal most to them. As always, garner the support of the board for your plans for the future.
Some legislators, worried about the future of nonprofits, are looking for ways to make charitable donations result in tax savings again. For right now, both the increased standard deduction and the deduction cap of $10,000 for state and local taxes will expire in 2025. Since the future of the tax code changes beyond 2025 is uncertain, both nonprofits and their donors should keep abreast of tax code changes over the next several years. If you need help planning for the impacts of the TCJA, consult with us or your CPA firm.
Bruce Prendergast, CPA, MS, is a tax director with LaPorte CPAs & Business Advisors, one of the largest accounting and business advisory firms in the region, with over 180 personnel in Louisiana and Texas.