TCJA Hot Topics: Tax Reform Impact to NPOs
Tax Principal Jen Vacha has more than 15 years of experience, specializing in nonprofit, individual and small business returns. Jen is also responsible for the firm’s nonprofit tax engagements. In the wake of the new tax reform, Jen has been fielding questions related to the new tax legislation and how it might impact nonprofit organizations and charitable giving. Here are a few of the questions Jen has been answering:
Q: Entertainment is no longer an eligible tax deduction for “for-profit” businesses. How does this impact NPOs? How does it affect golf events and other fundraising entertainment?
A: This change does impact NPOs because nondeductible entertainment is now reported via Form 990-T and subject to tax (21 percent for corporations). It does not, however, affect fundraising events. Unrelated business income tax (UBIT) is generated based on any nondeductible entertainment expenses paid by an NPO. This includes tickets to sporting events, theaters, amusement activities and recreational activities as well as club dues paid by the organization. However, costs for recreational and social activities for employees continues to be deductible.
Q: How will the new rules under the TCJA impact unrelated business income for NPOs?
A: Unrelated business taxable income (UBI) 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.
Q: If an NPO’s unrelated business activities generated a net operating loss (NOL) in prior years can those losses still be used?
A: Yes, the NOL can still be carried forward to future tax years and the 20-year limit on carryforwards is eliminated. However, the loss can only be applied to the net income of the business that generated the prior year loss. In addition, an NOL incurred after 2017 may only be used against 80 percent of taxable income in the carryforward years.
Q: How will changes to the standard deduction impact individual giving?
A: The standard deduction for individuals has increased to $24,000 for married individuals filing jointly, $18,000 for head-of-household, and $12,000 for all other taxpayers. If donors are less inclined to give because they are not itemizing, NPOs could feel a negative impact. However, individuals who continue to claim itemized deductions may gain additional benefits from their cash donations to public charities since the new tax legislation increased the maximum amount deductible by individuals to 60 percent of adjusted gross income if all contributions are cash to public charities. In that case, NPOs could see donors giving more to take advantage of this increase.
Q: Does the expansion of the standard deduction and anticipated decline in taxpayers claiming itemized deductions impact an NPO's responsibilities for issuing donor acknowledgement letters for gifts?
A: No, the expectation that fewer taxpayers will itemize their deductions does not have an impact on an NPO's obligation to issue a proper donor acknowledgement letter asserting the necessary facts related to the donation. Publication 1771 still rules.
Q: Should my conversations with potential donors be different, based on tax reform changes and potential impact?
A: It’s important to remember that emotions still motivate most people beyond just receiving a tax deduction. Always keep your conversations values-based as opposed to transactional. It’s as important as ever to be sure you’re building relationships with potential donors and maintaining personal relationships with people who have already made gifts to your organization. Charitable giving is contagious and can be influenced by others, so encouraging donors and potential donors to be good stewards of your organization will be imperative for your fundraising success.