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Are Non-Profit Entities Feeling the Impact of Federal Tax Reform?

Continue reading for a look at both some of the non-profit sector’s primary concerns – and see whether they’ve created an impact in the early years of the tax code’s implementation. 

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Continue reading for a look at both some of the non-profit sector’s primary concerns – and see whether they’ve created an impact in the early years of the tax code’s implementation. 

It’s been nearly two full years since President Trump signed the Tax Cuts and Jobs Act – the most comprehensive tax reform package the country had seen in decades – into law. The sweeping bill, from the time it was first introduced to Congress, was – unsurprisingly – controversial. And its biggest critic was perhaps the country’s collective non-profit industry. 

Just a few days after the bill was enacted into law, the National Council on Nonprofits (NCN) – a group that had been critical of the sweeping tax reform bill since its introduction – released an ominous statement, saying “…with very few exceptions, the bill harms the ability of charitable nonprofits and foundations to address needs in communities and advance their missions.” 

For the purposes of this article, we’ll look at both some of the non-profit sector’s primary concerns – and see whether they’ve created an impact in the early years of the tax code’s implementation. 

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The Concern: Doubling the Standard Deduction Will Decrease the Number of Individual Donors.

Non-profit organizations across the country voiced several concerns in the tax reform package, with a noted emphasis on the doubling of the standard deduction, increasing from $6,300 to $12,000 for individuals; from $12,600 to $24,000 for married couples; and from $9,350 to $18,000 for heads of households. The concern for non-profits was that, by doubling the standard deduction, most taxpayers would no longer have any reason to file itemized donations, which would significantly weaken their pool of prospective donors. Research backed that theory up: A study conducted by the Urban-Brookings Tax Policy Center found that, while only 26% of taxpayers filed itemized returns in 2017, that small pool represented more than 80% of all charitable giving reported in the United States. 

The Concern: The Gap Between Restricted and Unrestricted Contributions Will Increase Due to the Decrease in “Smaller Donors.”

In the non-profit industry, a significant amount of attention is paid to the distinction between restricted and unrestricted donations. Unrestricted donations are contributions made to a non-profit entity with no strings attached. These are typically in the form of end-of-year donations from individual donors, and they’re typically used to support the day-to-day operations of the non-profit (think: staff salaries, rent and the like). Restricted donations are earmarked for a specific project or campaign (think: specific programs or constructing a new building). Donors have the right to place a restriction on any contribution they make, regardless of the dollar amount – but, for the most part, restricted donations are typically big-dollar contributions made by an entity’s wealthier supporters. 

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The wealthiest donors likely won’t be impacted by the new federal tax law. In fact, by increasing the limitation for cash contributions from 50% to 60% of a donor’s adjusted gross income, the new tax bill may encourage wealthy donors to contribute more.  

But non-profit leaders weren’t worried about their wealthiest donors. They were worried that, if their first concern – that doubling the standard deduction would disincentivize their smaller donors from making their annual contributions – proved true, they would lose a significant portion of the unrestricted revenue that supported their day-to-day operations. 

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Have Non-Profits Felt an Impact?

It’s only been one year – but yes, the non-profit sector has seen movement in its overall donor levels. According to a report from Giving USA, individual giving fell 1.1 percent from 2017 to 2018, ending a four-year streak of steady increases and marking the largest single decline in individual donations since 2009. Additional studies show that the downward trend in total fundraising revenue and individual donor levels continued in 2019.  

The Association of Fundraising Professionals’ quarterly Fundraising Effectiveness Project report found that revenue from charitable gifts in the first half of 2019 compared to the first half of 2018 was down 7.3 percent across the industry. The same study reports that the total number of individual donors is down 5.8 percent and “mid-range gifts” – defined as donations between $250 – $999 – have fallen 3.5 percent. 

Of course, one year is a small sample size – and, yes, it is difficult at this time to say whether these trends are directly related to tax reform. However, it does seem as though the non-profit sector’s original concerns may have been valid.  

 

Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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