The newly enacted “Tax Cuts and Jobs Act” (the “Act”) includes sweeping changes to how individuals, closely held corporations and other public and privately owned businesses tax their income. Not to be forgotten, nonprofit organizations are also preparing for what could be dramatic changes to their levels of charitable donations, potential spending cuts at the federal and local level and taxes to certain private endowments.
Following are potential impacts that could be felt across the nonprofit sector as a result of the nation’s most extensive tax overhaul in 30 years.
Reduction in Charitable Giving
One of the most significant changes made to the individual tax code is the expansion of the standard deduction. Beginning in tax year 2018, taxpayers who opt for the standard deduction will see nearly a 50% increase – $12,000 (up from $6,350) for singles and $24,000 (up from $12,700) for married filers. Due to this expansion, it is widely expected that fewer taxpayers will itemize their deductions, where they would typically be able to deduct applicable expenses, such as charitable contributions.
According to experts, only a small number of taxpayers will likely have sufficient deductions to continue itemizing on their tax returns, meaning the vast majority of individuals will not be able to claim a deduction on their charitable giving. According to the Joint Committee on Taxation, the number of taxpayers expected to itemize their deductions is predicted to drop from the current 30 percent to just 5 percent. With that in mind, there is wide speculation that this change could dramatically reduce the influx of donations to nonprofits given the limited tax incentive – possibly by as much as $20 billion, according to the Tax Policy Center.
Additionally, the “Act” increases the size of estates that will be subject to the federal estate tax by more than double, and is likely to reduce the incentive for wealthy estate owners to donate to charitable organizations.
More broadly, many expect charitable giving to decrease due to the uncertainty most individual taxpayers may feel in the wake of the tax reforms.
Excise Tax on Private Endowments
The “Act” also includes a 1.4 percent excise tax on investment income at private colleges and universities that meet a certain threshold (500+ students and $500,000 asset value per student). While, in total, these parameters mean only a limited number of institutions will be impacted, the list does include many of the wealthiest colleges (Harvard and Stanford, for example) as well as some smaller colleges with lower student counts relative to endowment size.
It remains to be seen how affected colleges and universities will handle the excise tax in practice. A number of details are unclear at present, including exactly how net investment income will be calculated and which assets may be considered exempt under the new law.
Potential Cuts to Federal Spending
Given the deficit expected to be incurred as a result of the tax cuts outlined in the “Act”, many experts forecast that the federal government will resort to spending cuts for social services, many of which rely on federal funding to operate. Nonprofit organizations such as schools, senior centers and other entities may see sharp cuts to their funding – and subsequent fundraising budgets – if the government opts to make cuts to state and local funding, which feed into these programs.
To discuss the tax reform implications for your nonprofit organization, please reach out to our team.