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. 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% 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% 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% 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 some “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% 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%; 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 might reduce it. The impact of others, the elimination of estate taxes for instance, may not be as clear.

With the House bill drafted to go into effect January 1, 2018, many organizations are already well into their planning for the 2018-19 year. Many organizations start counting January 1, but for many educational institutions, January 1 marks the halfway point in their fiscal year, further complicating the situation. 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.
For instance, 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.