Potential Impact of the Tax Proposal on Nonprofits

Tax reform legislation has been introduced in the House of Representatives with potentially significant implications for the not-for-profit sector, particularly higher education, and especially major college athletic programs. While there are likely to be many revisions before anything is enacted, it is possible that a new bill will be signed into law effective for 2018. The House bill is in mark-up with some amendments already approved, and the Senate version is expected within days.

Here are some of the key provisions related to philanthropy.

  • A doubling of the standard deduction to $12,000 for single taxpayers and $24,000 for married couples filing jointly.
  • For those who itemize deductions, an increase from 50 to 60 per cent of adjusted gross income on the limit of cash gifts to qualified charities and from 30 to 60 percent on gifts to foundations. The 30 per cent limit for gifts of capital gains property would remain.
  • Removal of the limit on deductions for higher-income taxpayers.
  • An increase of the current estate tax minimum of $5.9 million to $10 million with the tax phased out in 2024.
  • An excise tax of 1.4 per cent of income on endowments at about 70 private colleges and universities of 500 or more students with endowment levels of $250,000 or more per student.
  • Elimination of the 80/20 rule for donors who receive rights to purchase tickets to “home” athletic events. The way the current draft has been written, instead of an 80% deduction on qualifying gifts, no deduction would be allowed if preferential seating consideration results.

There are other provisions impacting the nonprofit sector such as a 20 per cent tax on compensation over $1 million among the five highest paid employees of a not-for-profit organization; tightened rules on donor advised funds; replacing the two-tier excise tax on foundations with a flat 1.4 per cent; and, requiring foundations accepting donations of art to exhibit each piece for at least 1,000 hours each year.

The impact of any one of these provisions is still being sorted. Some preliminary estimates are that they might cause giving to drop by as much as $14 billion from the $390 billion given in 2016. Some changes, such as the increase in giving limits and the removal of deduction limits might increase giving, while some like those in athletics might reduce it. The impact of others, the elimination of estate taxes for instance, may not be as clear.

The most immediate impact is almost certainly going to be on athletics if the 80% deduction of gifts for seating rights is eliminated. Institutions reported $1.2 billion of giving for athletics in 2015, not all of which was related to preferred seating. With the House bill drafted to go into effect January 1, 2018, many athletic departments are already well into their planning for the 2018-19 academic year. Many start counting eligible gifts January 1 and some as early as December 1. How they communicate with their donors about the potential changes for their gifts and how they design future giving programs will be an enormous challenge that will require significant analysis and, likely, a complex, multifaceted solution.

We have already begun discussions with our higher ed clients about options for dealing with a repeal of the 80% deduction for gifts that provide priority ticketing for athletics. While we don’t know what will eventually come out of Congress, one thing is for sure: it is better to have a plan and not need it than to arrive at January 1 with no plan for dealing with a new reality that gifts that include ticket purchase benefits now have zero tax deductibility.

Please don’t hesitate to contact us if you would like our assistance as you navigate the changes that this, or other provisions of the proposal, will have on your institution.