New Law Could Be Taxing On Local Nonprofit Community
Several provisions of the new law could have far-reaching impacts for our civic-minded community.
1/29/2018 | Dean Krech, CPA, CGMA, Managing Partner
We are blessed to live in a city that has been described as one of the most philanthropic in the country. Indeed, Chattanooga residents are served by the important missions of many wonderful charitable organizations that give their time and talents to needy children, the elderly, disabled, the lower income population and more. Executives at local support-driven charities often find their organizations competing for annual budget dollars against others serving similar or different important missions.
In addition to intense local competition for charity dollars, the Tax Cut and Jobs Act of 2017 could provide even more of an obstacle for Nonprofits that provide critical services in our region. Several provisions of the new law could have far-reaching impacts for our civic-minded community.
Increase in the Standard Deduction
The new law nearly doubles the standard deduction for individuals and joint filers. While this provision will provide a higher deduction for many filers, it will also completely negate the tax benefit many taxpayers receive for making contributions. By increasing the joint standard deduction from approximately $13,000 to $24,000, many filers will now opt for the standard deduction. The National Council for Nonprofits states that the charitable deduction may now be out of reach for up to 90% of tax filers, causing a decrease of as much as $13 billion per year in charitable giving. Worse still, the Council estimates this could cause the loss of a quarter BILLION nonprofit jobs! Certain other national outlets are reporting even larger projected declines.
This provision could also result in more “bunched” giving. Already a strategy used by many to maximize benefit, this could be a choice donors make to give multiple years’ donations in one year so as to actually receive benefit. While perhaps beneficial for the donor, the Nonprofit is left in a position of cash flow shortages and revenue streams that are difficult to budget.
Certainly the intent of Federal lawmakers was not to strip resources from agencies that provide critical support services to the needy. Hopefully, bipartisan proposals will be introduced to resolve this unintended quandary in the coming year. Theoretically, the answer would be an above-the-line deduction, providing non-itemizers with a tax benefit.
Doubling of the Estate and Gift Tax Exemption
The law maintains the estate tax, but doubles the exemption to approximately $11 million for individuals and $22 million for couples. This means far fewer wealthy individuals will be hit with the estate tax. Charitable giving is a strategy used by many to mitigate the estate tax upon death. With the recent changes, the use of this planning strategy will be minimized to an effective strategy for only the super-wealthy. National estimates provide that the change could lower charitable giving by $4 billion per year.
Changes to Unrelated Business Income Tax
Some charities help accomplish mission objectives with activities that are deemed to generate unrelated business income. These activities can be taxed at normal corporate income tax rates. While the new law does generally reduce corporate rates from 35% to 21%, filers with less than $50,000 of business income will see an increase from 15% to 21%. Many local charities may fall into this surprise area of exposure.
Athletic seat licenses – The 80% deduction which was formerly available is gone. What impact will this have on big-time college athletics?
Charitable mileage rate – Unchanged from the paltry 14 cents per mile in old law. Why?
It’s Not All Bad
The new law does contain a beneficial provision, in that it now allows charitable donations of up to 60% of a taxpayer’s adjusted gross income (AGI.) The old law stipulated 50% as the maximum contribution.
Also, many taxpayers in high-tax states may find severe limitations in their ability to deduct state and local taxes (SALT.) This is worrisome for those states and could impact donor funds available for year-end charitable giving. However, in Tennessee this is not as impactful since no true state income-based tax exists.
For the thousands of charitable donors in Chattanooga, the changes will make it more important than ever that we give with our hearts and minds. Research nonprofits whose missions mean the most for you and your family, and don’t let the tax law impact your charitable support plans. Let’s keep our community’s philanthropic culture strong.
Please contact JHM Certified Public Accountants for your questions regarding other important implications of the Tax Cuts and Jobs Act of 2017.
About JHM Certified Public Accountants
Since its founding in 1977, JHM Certified Public Accountants has grown to specialize in accounting, auditing and tax services to nonprofit organizations. Additionally the firm serves a diverse range of business clients throughout the Southeast Tennessee/North Georgia region, ranging from small start-ups to large corporations, with a significant concentration of clients in the construction, hospital, nonprofit / governmental and assisted housing industries.