While the year began with startling headlines like the above, it’s time for the nonprofit industry to reconsider what the true impact will be of the January 1, 2018 tax reforms. To help you understand the full picture, we’ve gone beyond headlines to identify all that’s at stake.
Take the time to review the reform, consider concerns that might impact the industry, and identify strategic opportunities that still lie ahead.
Ch-Ch-Ch-Changes (Turn and Face the Strange)
On January 1, 2018, the tax modifications President Trump signed into law became official. Of the many changes, here are some key things to note:
- There continue to be seven tax brackets.
- The ranges for single and joint filings are adjusted, and the rates are a bit lower.
- The standard deduction for single and joint filers just about doubled.
- The federal corporate tax rate was cut from 35 percent to 21 percent.
- Estate tax exemption has temporarily doubled.
- The way nonprofits calculate UBIT has changed. Nonprofits will no longer be able to subtract losses from one activity, from gains from another.
- Personal exemptions have been removed.
What These Changes Mean:
The implications of these changes are certainly a mixed bag. On the potentially concerning side are the following:
- With the standard deduction being much higher, there is less incentive for filers to itemize deductions. Under the new tax law, people are more likely to simply give out of altruism.
- An estimated 21 million fewer households will itemize their deductions. This can potentially result in a $12 billion decrease in annual giving (Total giving was $410.02 billion in 2017).
- The limitation on state tax deductions to $10,000 will result in limitations on tax deductions and therefore higher tax liabilities for high income earners in high tax states as well as higher property tax jurisdictions.
- With the new estate tax rules, there is less incentive (from a tax perspective) for people to make charitable gifts at the time of their deaths.
- The rise of the standard deduction has been argued to cover the loss of personal exemptions, but this will not be the case for all taxpayers and will depend on the number of exemptions they file.
But on the potential positive side,
- As the corporate tax rate has dropped from 35 to 21, nonprofits will pay less in taxes on UBIT.
- Many large corporations—including Walmart, JetBlue, JPMorgan Chase, and Home Depot—are passing their tax savings on to their employees in the form of pay raises. Walmart, specifically, will raise its starting wage from $9 an hour to $11 an hour.
- Many companies are also offering one-time bonuses to their employees. For example, Southwest offered a $1,000 bonus to all of its employees.
It’s worth noting that the last two points will bring more cash into the economy causing altruistic people to potentially give more.
While the concerns are startling and real, there are also some benefits to consider which allow for a more balanced view of the situation.
According to Ron Wangerin, the chief financial officer at Classy,
“People will take home more cash because of lower federal rates. What are they going to do with it? Do they take the extra cash and donate some of it to a nonprofit organization?
More cash in their hands from one-time bonuses and more cash in their hands from lower individual tax rates are great opportunities for nonprofits to say, ‘How do I be relevant to that donor so that they feel compelled to provide a portion of what they’re now getting back to my organization?
If the lower rate means that they’re getting $50 more per pay period, and there are two pay periods a month, that’s an extra $100 each month. Would they be willing to become a recurring donor at $25 a month? There are different strategies that a nonprofit may want to employ to try to get a piece of that pie.”
Additionally, Ron believes opportunities rise with larger donors as well.
“In regards to large donors, the higher standard deduction should not impact them as most itemize. Although the $10,000 state tax deduction limitation will impact certain donors, the new tax law has two distinct potential benefits from which nonprofits could see an increase in donations—the lower personal income tax rates will provide more cash from which to donate and the increase in Schedule A deduction limitations could provide more deductibility to their donations. So the donors who give more should have more to give and derive the same or better tax benefit.
“Can you have a proactive campaign to reach large donors with an appeal to give 10 percent of their net benefit to your nonprofit organization? You can design strategies around that and get creative with promoting the implications of the tax change and making people aware of the opportunity. You can say, “Hey, you’re already a donor. Would you consider contributing a little bit more? The answer is “no” until you ask.”
With more disposable income, individuals may feel a stronger willingness to donate, especially multiple times a year. But for donors to realize that willingness, organizations will likely have to take an active role in soliciting more gifts from individuals.
When your nonprofit creates more sustainable revenue streams such as these, you safeguard your organization from potential downturns due to external forces, such as tax reform.
Portfolio Diversification and Focusing on the Individual
In the face of all of this change, ask yourself three questions:
- What can I do to counteract the impact the reform will have on individuals solely motivated by tax incentives?
- What can I do to further motivate individuals purely motivated by the act of giving, now that they have more cash in their hands?
- What are my opportunities to diversify my revenue portfolio?
Now, more than ever, organizations need to invest in tools to diversify their revenue, such as online fundraising software. With options to give monthly, fundraise during your campaign, or dedicate their own birthday to your cause, your supporters will be empowered to make a significantly larger impact than ever before.
The organizations who suffer from the tax reform the most will be the organizations on the sidelines, waiting to see how the changes shift donor behavior. The nonprofits that overcome the changes will be those who actively participate in the conversation now, and speak openly to their donors about their concerns and hopes for the future. They will take it upon themselves to reignite their community’s intrinsic motivation to give.
In fact, nonprofits should consider the strength of their communities following this tax reform. With less financial incentive to donate, the individuals and organizations contributing to societal causes will more likely be doing so simply because they truly care and want to make a difference. They’re following their hearts, not their pocketbooks. This is significant and, when effectively harnessed, has the potential to create a following more avid and hungry for societal change than ever before.
While the changes are startling, and even frightening, the large, sweeping headlines are not the end of how your nonprofit operates. Each time you see an article or statistic that aims to strike fear and anger into your heart, consider what you have in your control to change. Give your strategy new life.
Interested in reading more on the tax law and the larger implications? Keep an eye out for an upcoming blog post that explores donor-advised funds (DAFs) and examines the full implications for your nonprofit.