The New Federal Tax Law and Charitable Nonprofits
Thursday, January 11, 2018 at 3:00 pm Eastern
The federal Tax Cuts and Jobs Act, enacted just days before the New Year, contains sweeping changes for individuals, for corporations, and for the work of charitable nonprofits. The changes create immediate uncertainty about what nonprofits must do now to comply and what changes state and local governments will likely make in response – such as changing their own tax codes and making spending
cuts, perhaps in ways that will affect nonprofit missions if nonprofits fail to step forward to protect themselves. Register now to join a free nationwide webinar presented by the National Council of Nonprofits, Now What: How the New Federal Tax Law Impacts Charitable Nonprofits, on Thursday, January 11, 2018 at 3:00 pm Eastern. Learn what operational changes you may need to make right away, what you need to know about related state and local policy changes, and other items that
will affect your nonprofit and the people you serve.
Congress Reconvenes with Immediate Action Items
The prime descriptor of Congress in 2017 as being "purely partisan" will have to change immediately if lawmakers are going to keep the federal government open and enact other must-pass legislation, all while jockeying for advantage in the mid-term elections in November. Much of the past year was taken up with efforts by Republicans to repeal the Affordable Care Act and enact the tax bill using the budget reconciliation process that permits legislation to pass by a simple majority without Democratic votes. That process is not available in the opening months of this year, meaning that Congress must attempt to resolve numerous high-profile and controversial legislative issues in regular order, which requires 60 votes in
the Senate. That gives Democratic Senators leverage in negotiating the terms of bills or blocking passage through filibusters. The following is a partial list of the highest priorities that could be packaged into one or more bills in the coming weeks:
- Omnibus Spending Bill: The federal government is currently funded through a continuing resolution (CR) that is set to expire on January 19. Congressional leaders are working to reach agreement on how much to spend for fiscal year 2018 (which started on October 1) and whether any of the other major issues discussed below can – or must – be included to pass a bipartisan bill. On the spending side, the biggest question is whether to increase just defense spending by $54 billion, add some to domestic programs, or, as Democratic leaders are insisting, provide an equal amount of increases for both defense and non-defense spending. Once the top-level spending decision has been made, appropriators will
allocate funding for each of the 12 separate spending measures and package them into one “omnibus” bill. Congress may have to adopt another stopgap CR, perhaps running into February, to give itself time to craft the big bill in a way that can secure enough votes to pass.
- Healthcare Funding: The CR that Congress enacted in December was supposed to provide enough funding for the Children’s Health Insurance Program (CHIP) through the end of March. But state, and now federal, officials are warning that some states may run out of money in the next two weeks for the program that provides health insurance for nine million children. Separately, Congress is being called on to restore funding for insurance subsidies for low-income individuals that President Trump ended in October, as well as provide temporary funding for reinsurance pools that help insurers pay claims for the sickest – and most expensive – patients. Bipartisan bills are pending on each of these issues.
- Immigration and Border Security: Congress must decide what to do about the fate of some 800,000 "Dreamers," young people brought to the United States illegally as children, who have been able to remain in the country under the Deferred Action for Childhood Arrivals (DACA) program. President Trump ended the Obama-era DACA program and gave Congress six months to find a resolution before the deportation process would begin. In the spending bill negotiations, the Administration reportedly is seeking a deal on DACA that also provides funding for construction of a southern border wall to deter illegal immigration.
- Disaster Assistance: Before leaving for the holidays, the House passed an $81 billion disaster relief bill to help communities affected by recent hurricanes in Texas, Florida, Puerto Rico, and the U.S. Virgin Islands, as well as wildfires in California. Passage in the Senate is likely, but the measure is caught up in the wrangling over an additional CR, the omnibus spending bill, and other priorities.
- Johnson Amendment: Language to politicize charitable nonprofits, houses of worship, and foundations was stripped from the tax bill, but the well-funded lobbying groups seeking legislation to repeal or weaken the Johnson Amendment have vowed to ramp up their efforts this year. Their first opportunity is the omnibus spending bill. That legislation could include language to block enforcement of the Johnson Amendment against even the most egregious violations by “churches,” as passed by the House in September in an earlier appropriations bill, or new language expanded to cover all
501(c)(3) organizations. See GiveVoice.org for more information on actions to take to preserve nonprofit nonpartisanship.
In Support of a Charitable Giving Incentive for All Americans
The end-of-the-year giving season is over and the Tax Cuts and Jobs Act has now taken effect; so what’s the real effect on charitable giving? The majorities in the House and Senate rejected data from experts showing significant losses of more than $13 billion annually in giving to charitable works, preferring their own assumptions that people will donate more if they have more money. No one knows with certainty how much Americans will give or not give.
Cost of Giving $3,000
For person in 22% bracket who doesn't itemize
($3,845 x .78 = $3,000)
For person in 37% bracket who itemizes
($3,000 x .63 = $1,890)
It is indisputable, however, that the cost of giving to charitable nonprofits went up for millions of taxpayers who will no longer itemize their deductions. A $3,000 charitable contribution given in 2018 by a person in the 22 percent tax bracket who doesn’t itemize will cost approximately $3,845 in pretax income. A person in the 37 percent bracket making the same $3,000 contribution and itemizing the deduction will see a cost of only $1,890. That’s nearly a $2,000 difference between the less-well-off and the rich for the same $3000 received by a charitable organization. The less-well-off need a break, too. Charitable works in local communities need and deserve an even-handed
incentive for all to give; all American should receive a charitable giving tax incentive.
- Tinkering with the Census 2020: Last week the U.S. Department of Justice asked the Census Bureau to add a question about citizenship status to the 2020 U.S. Census, according to ProPublica. Civil rights advocates and others are concerned that inquiries about citizenship status would significantly reduce census response rates, particularly in communities with high immigrant populations. The Census – which the Constitution states is to be a count of all "persons," not just those who are U.S. citizens – collects data used to assign congressional
districts and allocate federal funding to states, counties, and municipalities. A complete and accurate census count is important to nonprofits, since undercounts in communities can mean diminished representation in Washington and less federal support for social safety net programs, infrastructure, and other important work in their communities
- Tinkering with the Form 1023-EZ: Small organizations eligible to use a streamlined application for tax-exempt status now must give the IRS more information about how they plan to pursue their charitable missions. The 2018 version of Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” instructs applicants to describe their mission and most significant activities, actual or planned, in 255 characters or less. Applicants should not “refer to or repeat purposes in your organizing document or speculate about potential future programs,” according to revised instructions to the form posted on the IRS website January 3. The EZ form originally came out in 2014 as a management solution to the IRS’ large backlog of unresolved applications for tax-exempt status. At the time, critics of the proposed expedited approval process warned that the IRS was abdicating its duties. Those warnings proved accurate; in 2017 the Service was soundly criticized in a Taxpayer Advocate Service report documenting that the IRS
erroneously approves Form 1023-EZ applications “at an unacceptably high rate.”
- Association Health Plans: The Department of Labor (DOL) issued a proposed regulation last week that would expand the use of association health plans (AHPs). AHPs are arrangements through which multiple small businesses or nonprofits with a "commonality of interest" may set up a group health insurance plan that may be less expensive than individual employers could negotiate on their own. The draft DOL regulations propose loosening the "commonality of interest" rules for AHPs by allowing plans that serve employers in a state, city, county, or a multi-state metro area, or all the businesses in a particular industry nationwide. Critics are wary about whether the plans will provide adequate protections for consumers. Public comments are due in early March 2018.
- Business Mileage Rate Goes Up: The IRS announced that the standard business mileage rate has increased to 54.5 cents per mile in 2018 (up from 53.5 cents per mile in 2017). Many nonprofits use this rate when reimbursing their employees for work-related driving. The volunteer mileage rate – the amount that's tax-deductible when volunteers drive on behalf of charitable nonprofits – remains statutorily set at 14 cents per mile and can only be changed by Congress. A provision in an earlier draft of the tax bill would have adjusted the volunteer rate to inflation, but the
adjustment didn’t make it into the final legislation.
State Legislatures Convene to Confront Uncertainty Caused by the Federal Tax Bill
January marks the beginning of legislative sessions in 38 states, and the impact of the federal tax bill enacted just two weeks ago is top of mind for governors and legislators. Forty states link their tax laws to the federal code, yet the federal changes will affect states differently and lead to varied responses by legislatures. For instance, the standard deduction in 12 states automatically went up on January 1 because their tax codes
follow the federal standard deduction; eight states match the federal personal exemption, which has now been repealed. The National Conference of State Legislatures identifies the changes in the standard deduction and treatment as pass-through entities as potential state revenue reducers. The change in personal exemptions, a revised formula for calculating inflation, and adjustments to other deductions are potential revenue raisers.
While a few state governments, such as Colorado and Michigan, may initially see increased revenues due to how their tax laws interact with the Internal Revenue Code, many more states are predicting losses in tax receipts that could affect their current year budgets and require immediate changes to balance their budgets. Any one change to federal tax law can knock state budgets out of alignment, and states are in no condition to absorb revenue losses. In 2017, 22 states
suffered revenue shortfalls, making them unable to maintain services at existing levels. For instance, the ongoing Illinois budget crisis is legendary, while New Mexico and North Dakota are mired in at least their third straight year of spending cuts. Kentucky has a $1 billion budget hole and is already cutting human services, and Iowa expects to make cuts of between $45 - $90 million by June 30. Oklahoma doesn’t even have a budget for the Fiscal Year that started July 2017. And the list goes on.
States Responding to New Federal Limit on State, Local Tax Deductions
Governors and lawmakers in many so-called “high-tax states” have already started proposing state tax-law changes to work around the new federal tax law, which limits the tax deduction for state and local income and property taxes to $10,000. New York Governor Cuomo, in his 2018 State of the State address, said "we will explore the feasibility of a major shift in tax policy, and are developing a plan to restructure the current income and payroll tax system." He also said he is looking at creating “new opportunities for charitable
contributions to support public programs.” Governor-Elect Murphy of New Jersey announced last week that he is working on a plan that would essentially convert payments for property taxes into tax-deductible charitable donations, a move that could enable taxpayers to take much larger charitable deductions from their federal income taxes than otherwise available under the new tax law. The proposal is similar to a bill introduced last week by the California
Senate President that would permit charitable contributions to the California Excellence Fund in lieu of state taxes. State policymakers reportedly are relying in part on a 2011 memo from the Internal Revenue Service that appears to support full or partial tax credits for donations that fund tuition vouchers for charter, religious, and other private schools. The Tax Foundation predicts that these proposals may face legal hurdles.
Although the donations-in-lieu-of-taxes approach would not directly affect charitable nonprofits, it does raise numerous questions of unintended consequences. Would payment of taxes through such a process unnecessarily confuse donors about the independence of true charitable organizations? Could it cause “donor fatigue” or undue competition between governments at various levels and frontline nonprofits? Is it likely to encourage policymakers to reduce funding for critical public programs and lead to greater dependence on foundations to support charitable operations? We’d like to know what readers think: please drop us a line.
Government-Nonprofit Contracting Reform Update
Proof Positive that Government Grantmaking Reforms Work
As state and local governments and nonprofits continue to struggle with declining resources, Illinois' 2017 Annual Report on the Grants Accountability and Transparency Act (GATA) identifies millions of dollars in savings and cost avoidance realized through grant/contracting reform efforts. For 2017, Illinois reports estimated savings or cost avoidance of more than $236 million. The most significant savings came from adopting a unified audit approach ($183 million) and following the unique Illinois process of centralizing the negotiation of indirect cost rates (saving $35 million). Other important savings
or avoidance of costs came in the areas of a centralized framework for risk assessments ($8.5 million), online grantee pre-qualifications ($4.4 million), and automated notice awards ($2 million). Many of the reforms were made possible because Illinois, through GATA, adopted the federal grants reforms from OMB Uniform Guidance, enabling the state to streamline operations into one set of policies and procedures for grants and contracts with nonprofits, regardless of their funding source. The grantmaking reforms adopted by Illinois provide a roadmap for other states, and the new report shows that governments can reduce
costs while maintaining and even improving essential services through the work of charitable nonprofits.
Award Winning Advocacy
Has your nonprofit board done what it takes to earn the prize for advocacy engagement? This is no idle question, because there’s $5,000 on the line for the correct answer.
BoardSource, the recognized leader in nonprofit board leadership, training, and data, has created The Stand For Your Mission Awards to recognize the critical role that boards play in standing up for the organizations they believe in by advocating for their
organizations' mission. The awards will honor nonprofit boards that have established advocacy as an expectation for engaged and effective board leadership.
The winning organization will receive a $5,000 cash award and be featured on the BoardSource website, the Stand for Your Mission website, and in social media. Apply Today!
The awards are the outgrowth of the Stand for Your Mission campaign, an ongoing effort to build awareness about the importance of board advocacy to advance an organization’s mission. The goal is to inspire and challenge board leaders to “stand for your mission” through active engagement as ambassadors and advocates for their organization’s work.
At the center of the campaign is this definition of nonprofit advocacy -- however one answers this simple question: “Who can I talk to today to advance my organization’s mission?” The campaign highlights success stories, provides ample resources and tools, such as a discussion guide, expectations for engaged leadership, and
how advocacy is fundamental to Ten Basic Responsibilities of Nonprofit Boards.
The founding partners of the Stand for Your Mission campaign are BoardSource, National Council of Nonprofits, Bolder Advocacy, Campion Foundation, the Knight Foundation, and United Philanthropy Forum.