How Tax Reform Impacts NPOs and Charitable Giving
The Tax Cuts and Jobs Act (TCJA) signed Dec. 22 by President Donald Trump is touted as representing the most sweeping changes to the U.S. income tax code in over 30 years. Nonprofit organizations (NPOs) need to understand changes enacted by TCJA and how they may directly or indirectly impact them.
For example, TCJA has the following direct and specific impact on colleges and universities:
- A new 1.4 percent excise tax on net investment income (certain private universities).
- No deduction for amounts paid for college athletic seating rights (colleges and universities).
TCJA also has the following broad-based impact on areas of unrelated business income (UBI), compensation and fringe benefits, and K-12 education:
- UBI: Unrelated business taxable income is now computed separately for each trade or business activity. NPOs may no longer use losses from one UBI activity to offset income derived from another UBI activity and the tax rate is adjusted to a flat 21 percent for corporate entities.
- Compensation: New excise tax on excess executive compensation (over $1 million) and excess parachute payments.
- Fringe benefits: Employer’s deductions for fringe benefit expenses are limited. Entertainment expenses are fully disallowed and certain transportation fringe benefits, including parking and on-premises athletic facilities, are taxable expenditures (unless incurred in direct connection with a UBI activity).
- Education: Through the expanded definition of Qualified Higher Education Expenses, Section 529 plan funds may now be used to fund K-12 private education costs, up to $10,000 per year per student.
Will individual giving be impacted?
Maybe. Changes under TCJA could have an indirect impact on NPOs. Caps, eliminations and expansions may result in fewer individuals claiming itemized deductions. If fewer individuals itemize, NPOs may see a decline in giving by donors motivated purely by tax benefits. Changes that could reduce the number of individuals itemizing include:
- State and local taxes: The deduction for personal state and local taxes is limited to $10,000.
- Miscellaneous itemized deductions: The “2 percent itemized deductions” are eliminated.
- Standard deduction: The standard deduction for individuals has increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household, and $12,000 for all other taxpayers.
What does this mean for NPOs?
If donors are less inclined to give because they are not itemizing, NPOs may feel a negative impact. However, individuals who continue to claim itemized deductions may gain additional benefits from their cash donations to public charities since TCJA increased the maximum amount deductible by individuals to 60 percent of adjusted gross income. In that case, NPOs could see donors giving more to take advantage of this increase.
After NPOs understand the broad range of changes ushered in by TCJA, they can begin evaluating the impact TCJA will have on their operations and plan strategically to optimize the benefits and minimize the burdens and challenges.
To learn more about how TCJA may affect NPOs and strategies to improve the impact, register for our NPO Speaker Series event, “Tax Reform: Impact and Fundraising Opportunities,” on Wednesday, Feb. 21, or Wednesday, Feb. 28.