PNC CENTER FOR FINANCIAL INSIGHT Responding to Tax Reform a Nonprofit Action Plan The new tax regime may have significant implications on charitable giving, creating a need for non-profit organizations to examine the potential impact on their finances and assess donor engagement strategies. PNC Center for Financial Insight SM builds bridges from thought to action, creating practical, applicable strategies to help benefit you and your family. There is tremendous concern among many in the nonprofit community that the Tax Cuts and Jobs Act 1 will result in a sharp reduction of charitable giving. 2 In our opinion, the verdict is still out. However, in light of this period of uncertainty, there is a need to evaluate the impact of a potential fall-off in donations; plan for how to manage any such drop in funding; and determine if you are doing all you can to engage donors. The tax overhaul has for the majority of Americans, including those in upper income brackets, swept out or reduced many of the tax incentives for making charitable donations. The nonpartisan Tax Policy Center (TPC) forecasts a reduction in charitable giving of 4.5%, or $16-24 billion annually, due to fewer taxpayers itemizing. 3 A study commissioned by the Independent Sector predicts a decline of at least $13 billion annually. 4 Despite the bleak predictions, it is important to note that since 1976, charitable giving increased in current dollars every year except 1987, 2008, and 2009. 5 Philanthropy is not solely driven by the desire to trim tax bills; most individuals give for a variety of reasons. In our experience, the majority of donors support organizations because they believe in their missions. It is understandable that the uncertain impact on donations is creating stress for many in the nonprofit sector. Donations may decrease against the present backdrop of rising costs to conduct business, increasing competition for donor dollars and the growing importance of millennial donors, who unlike previous generations are known for forging their own approach to giving. 6 That s why we think it is critical to address a potential shortfall and have a strategy to keep donors as engaged as possible. Addressing Potential Funding Challenges It may take as much as six months before nonprofits have a strong sense of 2018 donations compared to prior years. This window presents an opportunity to set a plan for how to respond should a shortfall be 1 Officially titled to provide for the Reconciliation pursuant to titles II and V of the concurrent resolution on the budget for the fiscal year 2018. 2 http://www.taxpolicycenter.org/taxvox/house-tax-bill-not-very-charitable-nonprofits Contributing Author: Anne B. Hennessy, CAP Senior Resident Philanthropy 3 Nunn, James R., Leonard E. Burman, Jeffrey Rohaly, Joseph Rosenberg, An Analysis of Donald Trump s Revised Tax Plan, Tax Policy Center, October 18, 2016. http://www.taxpolicycenter.org/publications/analysis-donald-trumps-revised-tax-plan. 4 www.scholarworks.iupui.edu, p. 23. 5 Giving USA Foundation, Giving USA 2017. 6 Morgan Stanley Private Wealth Management/Campden Wealth Next Generation Wealth Report 2014, page 30.
January 2018 2 Three Noteworthy Changes There are three noteworthy provision changes that nonprofit organizations need to be aware of, as they could potentially impact their finances: 7 1. Changes in the unrelated business income tax (UBIT) calculation that will no longer allow nonprofits to offset gains with losses for UBIT generating activities. 2. Excise taxes will be imposed on non-profits if any of their five highest compensated employees have total compensation over $1 million. 3. Non-profit colleges and universities with endowment levels of $500,000 per full time student with at least 500 full-time students, half of whom are U.S. based will incur an excise tax. flagged. Below we provide some steps you may wish to take: Review cash flow and determine how it might be negatively affected under different scenarios, if donations decline. Analyze how different cash flow scenarios affect both operations and programs. Plan for ways to offset any shortfall. y It is a best practice to aim to keep one year s worth of operational expenses in short-term cash equivalents. How large is the cash reserve? And how much can you draw it down before other solutions are needed to support cash flow? y We believe it is worthwhile to speak with your investment advisor to determine if the investment portfolio has sufficient liquidity to meet ongoing cash needs. Consider when you might need to tap the investments and if and how you would need to adjust the asset allocation. y If a change in asset allocation is warranted, find out how this might affect portfolio performance goals. Study how the changes may affect your spending policy and plan for extreme measures. It is better to be prepared for a worst-case scenario than to be unprepared. y Analyze operations to find areas that can be cut, if necessary. y If you provide services for a fee, will fees need to be increased to balance a deficit? y Will services need to be scaled back? If so, set a plan for doing so. Analyzing the Impact In 2016, 72% of giving came from individuals, 15% from foundations, 8% from bequests, and 5% from corporations. 8 However, the Tax Cuts and Jobs Act may affect each donor source differently. And we expect individual donors to react differently as well. Below, we detail parts of 7 For full details, see table, page 5. 8 Giving USA Foundation, Giving USA 2017.
January 2018 3 Donor Data The tax overhaul may affect donors differently, making it particularly important to have as much data as possible on your donor base. The following questions will help you understand your donor base: Who supports your organization: individuals, foundations, or corporations? What is the average donation size from each source of funding and does any one type represent a stronger source of donations? What are the key demographics of individual donors: their age, wealth level, and history of overall charitable giving? Which individuals and organizations have consistently supported your organization? Which donors can be called upon to help support operational aspects of your organization? What motivates your donors? Are they committed to your mission, values, and/or leaders? Do they like to volunteer and be actively engaged? Do they support your organization for personal satisfaction and happiness? the legislation that may sway donor behavior. For each group there are opportunities and challenges, and we believe it is too soon to call the impact of the legislation. Incentives for Individuals Included Approximately 90% of taxpayers are now expected to take the standard deduction, up from 70%, eliminating the charitable deduction incentive. This is the primary driver of concern with respect to a potential decline in donations. Deductions, however, may be back. The Universal Charitable Giving Act (H.R. 3988/S. 2123) is proposed legislation that would allow nonitemizers to claim a charitable gift deduction up to one-third of their standard deduction, or $4,000 for individuals and $8,000 for couples. Many high-net-worth individuals and most of the ultra-affluent may likely continue to itemize. For itemizers, the Tax Cuts and Jobs Act includes provisions that may encourage greater giving. It raises the limit on cash contributions from 50% of adjusted gross income (AGI) to 60% of AGI. Additionally, contributions exceeding the 60% limitation can be carried forward for up to five years. 9 Also, the Pease limitations on itemized deductions for higher income individuals have been repealed. The Pease limitations reduced the value of most itemized deductions when a taxpayer s AGI reached a certain point. Foundational Differences Donations by public foundations may be affected more by the tax overhaul than private foundations. This is because public foundations rely on a broad base of donor funding for support. Bleak Bequest Data These data are not encouraging. As the exemptions for estate taxes rise, charitable bequests decline. 9 There is no change for noncash gifts. This benefit expires after 2025.
January 2018 4 College Sports Tickets Benched Donors to colleges and universities can no longer receive a charitable deduction for any payment made in exchange for the right to purchase tickets or seating for athletic events. Previously, donors could take a charitable deduction of 80% of the amount paid for the right to purchase tickets. Charitable giving by bequest is estimated to have declined 9% in current dollars between 2015 and 2016. 10 A charitable bequest is a provision in a donor s will or trust agreement that provides for a specific dollar amount or a specific item of property to be distributed to a named beneficiary or for a specified charitable purpose. Reduction in the estate tax has been a strong motivator to include charitable giving in estate plans. Ultra-affluent donors with estates in excess of the new estate tax exemptions of $11.18 million for individuals/ $22.36 million for married couples may continue to benefit from making bequests. Corporation s Contributions Corporations were major beneficiaries of the tax legislation, which slashed the corporate tax rate from 35% to 21%, and imparted a number of additional benefits. In a halo effect, many companies may step up to make increased charitable contributions. Engaging Donors It s likely your donor engagement strategy contains a mix of methods to communicate with donors, such as events, newsletters, and social media. Below we highlight three tactics that we believe should be part of your approach during this time of uncertainty. The personal touch: As you plan for the coming years of personal outreaches, it is a best practice to have an appropriate officer of the organization or a board member make personal contact with key donors, both in good times and challenging times. The value of personal connections, such as donor events or periodic phone calls, cannot be overemphasized. You may even consider expanding the number and scope of personal connections. Donors and Data: Donors, particularly millennials, are more critically analyzing the impacts of the organizations they support. They are seeking detailed reports that demonstrate how effectively goals have been met, map measurable progress against benchmarks, and are presented in a manner that lets the donors see the impact of their individual gifting. Demonstrate Success: Sharing success stories that underscore the personal impact of your charity can be highly effective. Multiple platforms demonstrate success can be utilized to reach donors in different ways. Conclusion The tax changes create a need for nonprofit organizations to carefully review their financial plans to determine the consequences and how a potential downturn in fundraising can be balanced. Additionally, donor engagement plans should be reviewed and potentially enhanced to allow for maximum personal donor engagement. 10 Giving USA Foundation, Giving USA 2017.
January 2018 5 Tax Changes Summary of Provisions Affecting Philanthropy Provision Standard Deduction Increase Deductions for Charitable Contributions Federal Estate Tax UBIT Donor Substantiation Requirements Tax Changes Tax Cuts and Jobs Act Impact The standard deductions are increased The Joint Committee on Taxation (JCT) for individuals from $6,500 to $12,000; estimates less than 10% of taxpayers for couples from $13,000 to $24,000; will itemize going forward, reducing and heads of households from charitable giving at least $13 billion $9,350 to $18,000. annually. The JCT also estimates this There was no change for noncash gifts. reduction in charitable giving would cost 220,000 to 264,000 nonprofit jobs. Limitations on itemized deductions for higher-income individuals (Pease limitations) are repealed. Raises the limit on cash donations for Impact limited to taxpayers who itemize. those who itemize deductions to 60% of AGI from 50% of AGI. Expires after 2025. No provision to extend charitable giving deduction to taxpayers who do not itemize. Repeals the Pease Amendment, which imposed limits on itemized deductions. Doubles the exemption from $5.6 million to $11.2 million for individuals and $22.4 million for couples. Expires after 2025. UBIT will be calculated on each UBIT generating activity, not aggregated. Repeals an unused regulation allowing the IRS to create an optional tax return that nonprofits could file in lieu of providing donors with a written acknowledgment of contributions. The Universal Charitable Giving Act (H.R. 3988/S. 2123) is pending, which would allow non-itemizers to deduct up to one-third of their standard deduction ($4,000 for individuals, $8,000 for couples). Eliminates limits on itemized deductions for higher-income taxpayers. The Tax Policy Center predicts a decline in charitable giving of 4.5% or $16-24 billion annually. Could affect planned giving vehicles, including charitable trusts, charitable gift annuities, bequests, and beneficiary designations. The first $1,000 of UBIT is exempt from taxation under current law. The change could result in increased taxes on nonprofits. IRS substantiation rules for donors and volunteers still apply. Rule repealed would have shifted the burden of substantiating a charitable donation from the donor to nonprofits.
January 2018 6 Provision Nonprofit Colleges and University Endowments Highly Compensated Nonprofit Employees Tax Changes Tax Cuts and Jobs Act Impact Places a new 1.4% excise tax on Estimates this will affect a small net investment income of nonprofit number of schools. colleges and universities with assets of at least $500,000 per full-time student and more than 500 full-time students; half of the students must be U.S based. Donors to colleges and universities can no longer receive a charitable deduction for any payment made in exchange for the right to purchase tickets or seating for athletic events. Imposes a new 21% excise tax on nonprofits that pay compensation of $1 million or more to any of a company s five highest-paid employees. Proposed Legislation The following provisions are under consideration. Provision Johnson Amendment Donor-Advised Funds (DAFs) Proposed Legislation Tax Cuts and Jobs Act Adopted in 1954, the Johnson Amendment (also known as preaching from the pulpit ) prohibits charities and churches from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. The House bill contained provisions weakening this law. A minimum required distribution was not included in either the House or Senate bill. Impact Changes were excluded from the conference report due to procedural requirements. On May 4, 2017, the president signed an Executive Order instructing the Treasury not to enforce the Johnson Amendment against religious organizations. It is likely there will be additional attempts to repeal and/or weaken this law. In December, the IRS issued Notice 2017-73 Proposed New Rules for Donor-Advised Funds, seeking comments on proposed rules relating to use of DAFs to satisfy donor s pledges, applying private foundation bifurcation rules and public support treatment of DAF distributions. Although it is not likely the current version of the proposal will be implemented, concern over the increasing balances and lack of oversight may lead to greater regulation at some point in the future. A minimum required distribution is not mentioned in this notice.
January 2018 7 Proposals that Missed the Cut The House bill proposed a 1.4% standard private foundation excise tax. The House bill prohibited taxexempt organizations from issuing private activity bonds. The House bill required art museums that are private operating foundations to be open to the public for at least 1,000 hours per year. The House bill allowed the volunteer mileage rate to be adjusted for inflation. The Senate bill imposed excess benefits penalties, reduced executive compensation safe harbors, and repealed a provision implementing intermediate sanctions against nonprofit boards in certain circumstances. For more information, please contact your PNC advisor. The PNC Financial Services Group, Inc. ( PNC ) uses the marketing name PNC Center for Financial Insight SM to provide wealth planning education to individual clients through its subsidiary, PNC Bank, National Association ( PNC Bank ), which is a Member FDIC. Standalone custody, escrow, and directed trustee services; FDIC-insured banking products and services; and lending of funds are also provided through PNC Bank. This report is furnished for the use of PNC and its clients and does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific investment objectives, financial situation, or particular needs of any specific person. Use of this report is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client s individual account circumstances. Persons reading this report should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. The information contained in this report was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC. The information contained in this report and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information in this report nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC does not provide services in any jurisdiction in which it is not authorized to conduct business. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Act ). Investment management and related products and services provided to a municipal entity or obligated person regarding proceeds of municipal securities (as such terms are defined in the Act) will be provided by PNC Capital Advisors. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC, the Federal Reserve Board, or any government agency. Securities involve investment risks, including possible loss of principal. PNC Center for Financial Insight is a service mark of The PNC Financial Services Group, Inc. 2018 The PNC Financial Services Group, Inc. All rights reserved.