When President Trump in December signed into law the biggest tax overhaul since 1986, he also ushered in a new era in the tax treatment of nonprofits and charitable giving.
One of the biggest changes, the doubling of the standard deduction, has been well covered by The Chronicle and others: With 21 million fewer households expected to itemize the charitable deduction, annual giving could decline by more than $12 billion, according to analyses by the Tax Policy Center. Middle-class donors and those groups that depend on them are expected to be most affected.
The doubling of the estate-tax exemption could further reduce gifts from estates by billions of dollars, according to at least some estimates.
Not everyone agrees with the gloomy forecast. Some nonprofit giving and tax-policy experts question projected declines in donations, citing a strong economy and arguing that no one knows exactly how tax policies affect giving behaviors. And the charitable deduction remains in place, they point out.
Nevertheless, fundraisers are already busy talking to donors about what the tax overhaul means for their giving.
In addition to the aforementioned provisions, a number of other changes will shape charitable giving and the management and operations of nonprofits.
The Chronicle dug into some of these less-well-covered pieces of the new law and talked to tax professionals and giving experts about how they may play out among donors and nonprofits.
Here is what you need to know.
The law increases from 50 percent to 60 percent the share of adjusted gross income a taxpayer can write off with cash donations to charities.
Who is looking to write off more than half their taxable income through the charitable deduction? In most cases, it’s retirees over the age of 65 living partially or largely on tax-exempt sources of income like Social Security and bonds, says veteran big-gift consultant Robert Sharpe.
Imagine a retired couple, he says, living off a combination of Social Security and the returns from several million dollars’ worth of stocks and bonds. The couple earns $40,000 of taxable money annually on their stock investments while taking in $80,000 in tax-exempt money. They make a $150,000 pledge to their college to be paid over five years.
“That is $30,000 year. That would mean that under a 50 percent AGI limit, they could only deduct $20,000. They would have to pay tax on the other $10,000 that they gave away.”
Under the new 60 percent AGI threshold, Mr. Sharpe says, that same couple can now deduct $24,000, while having to pay taxes on just $6,000.
The change in law increases the amount many older donors can deduct when making outright gifts as well as when they use cash to fund a charitable gift annuity — wherein a donor makes a significant gift to a nonprofit and gets a partial tax deduction and a fixed stream of income from the nonprofit for life — or other split-interest gifts, he says.
The new tax law scraps a limitation on the value of the charitable deduction for high-income earners.
The “Pease limitation” reduced for high-income Americans the dollar value of itemized deductions — including the charitable deduction — by 3 percent of income over a set threshold. In 2017, the provision affected single filers making more than $261,500 a year and joint filers making more than $313,800.
For example, a couple with income of $1 million would have to subtract $20,586, or 3 percent of income in excess of the threshold, in this case $686,200, from deductions claimed with the Internal Revenue Service.
Mr. Sharpe says doing away with the Pease limitation is a win for high-income big donors. It essentially restores any decreased tax benefit resulting from the lower individual income tax rates under the new law, he says.
“For those people, the game hasn’t changed at all,” Mr. Sharpe says. “It is exactly the same, with minuscule differences. And there are some people, actually, their tax subsidy is even more.”
Like other parts of the tax law affecting individuals, the provision sunsets and the Pease rule returns in 2026.
Some nonprofits will pay more to the IRS due to changes in the calculation of their unrelated business income tax, or UBIT.
Previously, nonprofits calculated their unrelated business income on an organizationwide basis. If one line of business made money and another lost money, the numbers were aggregated into a single sum. Under the new law, organizations must calculate each business line item separately, meaning they can’t use losses in one place to offset gains in another.
In addition, the net operating loss carryover is limited to 80 percent.
Brenda Blunt, a partner at the tax firm Eide Bailly who specializes in tax-exempt organizations, offers this example: Imagine an organization that sells advertising on its website and rents out a mortgaged building it doesn’t use for its exempt purpose. It earns $50,000 in internet advertising sales and loses $50,000 on the rental property.
Under previous law, it would have zero taxable income. Now, with the new corporate tax rate at 21 percent, it would pay $10,500 on the advertising income while carrying forward the loss from the rental business.
With regulations still forthcoming, there are still lots of unknowns about how the law will apply, especially at big institutions like universities and hospitals, Ms. Blunt says.
Still, the change will complicate and increase the cost of doing tax returns for some nonprofits, whether prepared internally or externally, says Ms. Blunt.
“It will also raise the amount of tax that organizations pay over time, because you won’t have the loser business available to offset the income on the winner businesses,” she says.
Many nonprofits with unrelated business taxable income will get hit by the tax law another way — on fringe benefits.
Previously, the cost of providing certain fringe benefits for employees, such as exercise facilities and transportation, with certain limits, was tax deductible. Not anymore.
One concrete example of how this will hit nonprofits institutions: employee-provided parking, says Laura Kalick, a director in the tax firm BDO’s health care, nonprofit, and education practice. A city college with a parking garage for employees, students, and the public will now need to implement a new system to separate the cost of the employee parking, she says.
“If you’re a hospital, then you are going to have to break it out for employees, patients, visitors, and the general public,” she says.
One possible workaround for organizations, she says, is to pay employees slightly more but charge them for parking.
