Tax Reform – Preparing for the Effect on Your NFP

Tax reform is a key discussion topic in Washington, D.C. Tax reform proposals affecting not-for-profits (NFP) receive considerable attention from the charitable sector and the nation at large. While health care reform is the primary focus of Congress, many forces diligently work on tax reform. With 2017 halfway over, where do we stand on tax reform related to NFPs? What should your organization consider while planning the rest of the year?

While many proposed changes appear to negatively affect charitable giving, there still are some favorable outstanding proposals such as the flat 1 percent excise tax on net investment income for private foundations, increased exemption amount for unrelated business income tax purposes and expanded qualified charitable distribution rules allowing gifts to donor-advised funds. Many of these favorable provisions have substantial support in Congress and the NFP sector. Passage will be conditioned in light of overall budget constraints.

Favorable provisions are offset by other potential tax proposals expected to decrease philanthropic giving in the United States. While many Americans favor a reduced income tax rate, this proposal is expected to hurt charitable giving. With lower income tax rates, there’s less incentive to donate. Simplifying personal income tax return preparation by increasing the standard deduction also may harm charitable giving. While about 30 percent of individual taxpayers currently itemize their deductions, that amount would noticeably decline. There wouldn’t be a direct tax benefit to nonitemizers making donations. Repeal of the estate tax also is projected to decrease charitable giving.

A few other proposed changes include:

• Restrict the donors’ ability to deduct contributions where they receive rights to buy athletic tickets—the so-called “80/20 rule”
• Expand the definition of unrelated business income to include previously excluded income sources, such as certain types of qualified sponsorship payments and royalty income
• Place payout mandates on or tax collegiate endowment funds
• Reduce the tax benefit of giving to certain types of NFPs

What steps can your organization take to help offset the tax reform effects?

• Review the effect of declining donations on your budget and consider alternative revenue sources
• Stay in communication with donors and continue to emphasize the nontax-related benefits of giving
• Share your concerns with associations that advocate for your industry
• Stay informed on the tax law proposals as they frequently and significantly change

Also, watch for a webinar later this year hosted by BKD and the Indiana University Lilly Family School of Philanthropy. The webinar will focus on understanding donors’ charitable motives in light of tax reform. This webinar weaves the complexity of the tax law with philanthropic research insights from Una Osili, the school’s associate dean for research and international programs.

Contact your BKD advisor if you have questions.