What you need to know: 6 Key Areas for Non-Profits
Standard vs. itemized deductions – Taxpayers have generally selected whichever method reduces their taxable income by the greatest amount. Under the new Act, the standard deduction has been increased from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for couples. As a result, fewer people might make the decision to itemize as it will not significantly reduce their taxable income. This, very likely, will have a negative impact on non-profits as charitable gifts can only be claimed as itemized deductions. The fact is, tax breaks do tend to incentivize people to make charitable donations. Less itemization means a higher probability of restricted giving. As a result, non-profits could lose out on an estimated $13 billion or more in upcoming years.
Charitable Contribution Deductions and “Pease” Limitation
Individuals can now take a greater deduction for charitable giving if they itemize their deductions. They can claim up to 60 percent of their adjusted gross income. Previously, the limit was capped at 50 percent. Also, the “Pease” limitation has been repealed. Therefore, there will be fewer restrictions for individuals who decide to itemize their deductions. This is good news as it could encourage high-income earners to contribute more to charity.
Unrelated Business Income Tax (UBIT)
In the past, organizations were able to combine and compute UBIT for all unrelated trade or business income. This meant that a loss from one economic activity could counterbalance income from another economic activity. This would then decrease overall UBIT. Going forward, however, an exempt organization cannot use losses from one unrelated trade or business to offset income from another. This can now only be done for the same unrelated trade or business. This may result in increased UBIT liability for some non-profits.
State and Local Tax (SALT) Deductions
The deduction for all state and local taxes combined cannot exceed $10,000. This includes income, property, real estate and / or sales taxes. Limiting the SALT deduction will boost taxes by approximately $36 billion next year, an amount that will rise to more than $90 billion by 2024. This provision is exceptionally detrimental to high cost of living states. A substantial number of individuals in these areas exceed the cap. This will likely have an adverse effect on non-profits as people will have less money available to donate.
Excise Tax on Executive Compensation
There will now be a new 21% excise tax on non-profits that provide compensation of $1 million or more to any one executive. This change could have a negative impact on non-profits as they will have to pull this money from somewhere else in their budgets. This is meant to bring rules of tax-exempt organizations’ executive pay closer to that of for-profits.
The estate tax will remain the same. However, the gift and estate exemption will be increased from $5 million to $10 million. It is projected that this will lower charitable giving nationally by an estimated $4 billion per year. There may be less incentive for wealthy individuals to donate as they can transfer property to beneficiaries tax-free.
2018 is sure to be full of uncertainty for non-profits. It may take a while for ramifications of the new Tax Law to be felt. Analysis and planning will be key in moving forward. As an organization, you must recognize where you’ve been and develop a strategic plan for the future. Understanding how the law will impact your non-profit on both a federal and state level is crucial. Here at Buchbinder, we have you covered! Our professionals are investing significant time in understanding tax reform and other developments in the non-profit sector. We are here to help you in any way that we can. For more information, please reach out to Ted Kirshenbaum (212) 896-1931 or Michael Friedman (212) 896-1912.