This summer has been one for the books — and often in ways that have involved challenges for organizations. Inflation rates have hit an all-time high surpassing upper levels within the past 40 years, with food, gas and rent prices soaring across the U.S.

For nonprofits, inflation can have a profound effect. Organizations that rely on donations to stay afloat often struggle to keep up with the rising costs of goods and services. Donors are also often reluctant to give more when prices increase on everyday items. In addition, nonprofit organizations depending on government grants and fees for service, such as Medicare, face fixed funding while expenses are rising, resulting in an operational deficit.  Subsequently, nonprofit organizations find themselves squeezed on both ends—barraged with a surge of need while also financially unable to provide a full breadth of services.

While the government tries to ease inflation's national impact with legislative measures, including the newly passed Inflation Reduction Act, the impact on the nonprofit world can at times feel slow-reaching.

Caught In the Middle

With the U.S. inflation rate reaching 9.1% this summer, many families struggle to make ends meet. The impact of inflation is particularly acute for lower- and middle-income households with less disposable income. For these families, even a slight increase in the cost of necessities can be devastating.

A recent report shows that 61% of U.S. consumers live paycheck to paycheck, just one unexpected expense away from financial disaster. As a result, many individuals struggle to afford their basic necessities, and nonprofit organizations have been working hard to fill the gap. Organizations that offer direct services — such as food, housing and healthcare — feel the weight the most.

However, with expenses increasing and donations receding, nonprofits find their budgets stretched thin, forcing them to cut or lessen services.

To further compound the issue, the nationwide talent shortage continues to be a significant challenge for nonprofits, with funding restrictions — and now inflation — limiting their ability to offer competitive wages.

Mitigating the Impact

In the face of inflation, nonprofits are forced to do more with less, stretching their donations to cover an ever-growing list of needs. This can be a tricky balancing act, and it often falls to the nonprofit's staff and volunteers to find creative ways to make ends meet. By thinking outside the box, nonprofits can take measures to help weather the inflation storm and continue their vital work in the community.

Below are a few strategies your organization may want to consider using:

• Communicate honestly: Many donors may not consider how inflation erodes their contributions' purchasing power, so you must communicate this reality with transparency. Explain how inflation impacts your bottom line and negatively affects your quality or quantity of services. Remind your supporters they are the backbone of your organization, and you need their help now more than ever.
• Reach out to Recurring Donors: One way to offset the impact of inflation is to ask recurring donors to consider increasing their existing gift size and/or giving frequency in a way that fits their budget.
• Ask for Flexibility with Restricted Grants: If unrestricted funds are low, your organization may find it difficult to cover basic operating expenses. In such cases, it may be helpful to reach out to donors and ask them to lift restrictions on their gifts to ensure viability during this tough economic time.
• Emphasize Non-Financial Assistance: Remind your donors that while monetary donations are always appreciated, sometimes the best donation a person can make is simply their time and effort. Communicate the type of volunteer work you need. Encourage them to connect you to their networks.
• Retain Your Talent: To retain employees and remain competitive in the job market, beyond bolstering wages when possible, nonprofits should focus on creating a positive and inclusive work environment and enhancing benefits, such as health insurance, retirement plans and paid time off.

The Inflation Reduction Act

To combat inflation and address other pressing issues facing the nation, President Biden signed the Inflation Reduction Act (IRA) on Aug. 16. The $739 billion package includes climate change, health care and tax-relief provisions.

While the bill may not directly improve the impact inflation on nonprofits in the immediate future, the ways it will have an effect over the next years are through:

• Energy Efficiency Tax Incentive: With much of the bill focused on combatting climate change, one of its measures includes expanding the 179D energy-efficient commercial building tax deduction to nonprofits. Going into effect Jan. 2023, the IRA also includes an increase in the deduction amount from $1.88 per square foot to $5.00 per square foot.
• Affordable Care Act Subsidies: The IRA extends the Affordable Care Act (ACA) health insurance subsidies to reduce monthly premium expenses for the next three years. The subsidies were initially set to expire at the end of this year. The move may benefit nonprofit organizations as more employees may choose to subscribe to a plan in the state-run exchange program, lowering health insurance costs.
• Negotiated Prescription Drug Rates: The IRA will require Medicare to negotiate the prices of certain prescription drugs in 2026. While the provision will benefit Medicare recipients, it may impact the financial reporting for nonprofit organizations that receive donated pharmaceuticals due to the valuation of inventory for gifts-in-kind becoming significantly reduced.

Next Steps

To navigate inflation, larger nonprofit organizations may want to enlist the help of financial professionals who can help them optimize costs and enhance revenue. With the right financial partner, nonprofits can receive guidance on investments and strategies that can help stabilize finances in the face of economic volatility.

For questions or additional information on how these legislative changes may impact your nonprofit organization, please contact us. 

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