January 26, 2017

Changes in the Tax Code Could Affect Not-for-Profits (article)

CBIZ explores how tax reform could affect not-for-profit organizations.Comprehensive tax reform supported by President Donald Trump and House Republicans could have a ripple effect on not-for-profit organizations.

During his presidential campaign, President Trump advocated for reform of the tax code. Among other items, he proposed eliminating the estate tax, a provision also favored by the House Republicans’ Tax Reform Blueprint. Proposed changes to the amount of itemized deductions individuals can claim for tax purposes have also been supported by both House Republicans and President Trump.

Individuals often minimize their tax burden by making charitable contributions. The changes proposed to itemized deductions and the estate tax may have a corollary effect on the support base for not-for-profit organizations. As such, not-for-profit organizations should be monitoring these proposals so that adjustments can be made as needed to their donor outreach, in order to minimize any negative impact on their support base.

The Current State of Giving

Over the past 30 years, charitable contributions to not-for-profit organizations have been increasing. The Giving USA 2016 report found individuals contributed nearly $264.6 billion to not-for-profit organizations, a 3.7 percent increase from 2014 when adjusted for inflation. Religious organizations received the greatest percentage of total gifts, followed by educational institutions, human services organizations, foundations and health groups.

Individuals can claim charitable contributions as tax deductions that reduce their income and estate tax liabilities. Charitable contributions are a type of deduction that comprises an individual’s total itemized deductions, which is claimed on Form 1040, Schedule A.  The total amount of itemized deductions that can be claimed by individuals is limited, however. For 2017, single taxpayers with adjusted gross income that is in excess of $261,500 ($313,800 for married couples filing jointly [MFJ]) are limited to the lesser of 3 percent of such income over the threshold of 80 percent of their total itemized deductions.

For estate taxes in particular, the charitable contribution deduction is an appealing one. Estates with assets having values in excess of the lifetime estate and gift tax exclusion amount are subject to a 40 percent tax rate. The lifetime exclusion amount for 2016 is $5.45 million, and in 2017 it will be $5.49 million.

Those estates with asset values in excess of the lifetime exclusion amount can also take advantage of annual gift giving exclusion amounts, which allows for the tax-free transfer of assets out of the estate. The annual gift giving exclusion amount is $14,000 in 2016, and will be the same amount in 2017. Married couples filing jointly may elect to split a gift to a single recipient between themselves, so that a single recipient could be provided up to $28,000 from the married couple tax-free (using the annual gift exclusion amount).

Individuals might also establish a charitable lead trust, which provides distributions to a qualifying charitable organization over the donor’s lifetime and allows the remaining balance to pass on to the donor’s heirs tax-free. A charitable remainder trust is also an appealing choice, which allows individuals to claim a partially-deductible charitable contribution for funding the trust, while also creating a vehicle to sell low-tax basis assets and defer the tax on those sales.

How Tax Provisions May Change

President Trump’s campaign tax plan recommends capping itemized deductions at $100,000 per single taxpayer ($200,000 MFJ).  He favors increasing the standard deduction to $15,000 for single taxpayers ($30,000 MFJ), which may result in increased utilization of the standard deduction without reference to the charitable contributions such individuals might make.

The House Republicans’ Tax Plan also favored changes to the itemized deductions, calling for all itemized deductions to be eliminated with the exception of mortgage interest deductions and charitable contribution deductions. If the House plan is approved, it potentially could persuade individuals to make more charitable contributions, so they can take full advantage of the tax benefits available.

Both the House Republican Plan and President Trump have voiced support for appealing the estate tax. Under President Trump’s plan, the estate tax would be repealed, but unrealized capital gains attributable to assets held in the estate would be taxed if the amount of such capital gains were above $10 million. Hence, contributions of appreciated assets to a private charity established by the decedents would not be allowed. The prospect for a complete repeal of the estate tax remains uncertain; it was attempted under the Bush administration and phased out for the 2010 tax year, but the phase-out was not permanent. Congress reinstated it and made it permanent in 2013 under the American Taxpayer Relief Act.

The two tax reform plans also share a common goal to decrease the top individual income bracket from its current 39.6 percent rate to a 33 percent rate. This could result in significant savings for those in the affected brackets, who often comprise a not-for-profit organization’s most significant contributors.

What Not-for-Profits Can Do

President Trump and Congress have both called tax reform a high priority for the coming Congressional and presidential term. Activity on tax reform legislation could come during the first 100 days of the Trump administration.

Not-for-profit organizations receiving significant support from charitable donations should be prepared for changes that result from these proposals. Without a tax-relief motivator, it is conceivable that donations to not-for-profit organizations could decline. Proactive efforts to promote the other benefits of donations to a not-for-profit organization can reinforce the importance of those other reasons why donors should consider support for the organization.

Large donors often support not-for-profit organizations based on the mission of the organization, the relationship the donor has with the organization, or because of a specific need. Not-for-profit organizations should keep these ideas in mind when communicating with donors, and should review and update donor literature accordingly. Case statements that focus on the outcomes from the donor-supported programs should be emphasized. Individual stories may also be good to feature prominently within an organization’s messaging.

Organizations may also want to remark on the prospect of tax breaks with respect to gifting opportunities. For example, if tax reform legislation results in tax savings, a donor could consider a donation of those savings to a not-for-profit organization, and be no worse off economically than before the tax reform legislation. Similarly, a repeal of the estate tax could entice a donor to consider a donation of an amount otherwise payable in estate tax.

While the outcome of these tax reform proposals remains uncertain, not-for-profit organizations should consider consultation with a knowledgeable advisor to gain an understanding of how tax reform could impact the organization’s financial position. Spending policies may need to be reevaluated to prepare for fluctuations in charitable giving that may be ahead. For more information, please contact us.

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Copyright © 2017, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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