Abridged: The New Nonprofit Law for Dummies
One of the most difficult concepts nonprofit leaders have been trying to comprehend in the last few months is the massive mess that is the new tax code. Before I get into nitty-gritty terminology of the new nonprofit law, let’s lay it all out with an easy and relatable 8-year old analogy: running a lemonade stand.
Your mom agrees to buy the supplies, but like any parent, help comes with a catch. She’ll get everything on condition you give a percentage to your “College Fund.” This is known as taxable income.
As the summer drags on, you dream of how fat your piggy bank would be if only you could keep more of your money. Mom, sensing your sadness—but more importantly, an opportunity for yet another lesson—offers you another deal. Let’s pretend enough neighbors were guilted into buying your watered-down lemonade that you were able to make $20 and out of that, Mom normally snatches 10 percent, or $2. Now though, she’ll let you “hide” some—say, $5—so when she grabs 10 percent, she’ll only walk away with $1.50. These are called deductions.
Two choices are given: either you take out a set amount like $5 every time she comes around, or by doing specific chores, you earn the ability to take away another dollar, which stacks. If you don’t have a lot of tasks to do, or just can’t be bothered to do extra work, then it’s a no-brainer to choose the former—the standard deduction. If you think you can rack up enough things to do, then the latter is the obvious choice—the itemized deduction.
Bringing it back to our contemporary situation, those who would have taken the first choice can rejoice—the new tax bill massively increased the standard deduction, nearly doubling the amount that one can deduct across the board.
But something’s changed for itemized deduction, capping the State and Local Tax (SALT) deduction at $10,000. Imagine Mom had one chore in particular that happened a lot—say dishes. The more you washed, the more money you got to keep. What happens though, if she decides to limit the amount of dollars you get from that chore? You’d probably take the standard deduction, because now there’s less chance you’ll make it over its newly increased amount.
This is a pretty big deal for us, because if you can recall, you can combine chores/deductions to bring up the amount you save. Among those is the charity write off, but it has to be noted that according to the Tax Foundation, “… in tax year 2014, more than 95 percent of all itemizers, and 28 percent of all federal income tax filers, took a deduction for [SALT].” Since SALT got capped and the standard deduction got bumped up, fewer will be itemizing, making it less likely to donate to charity to shore up taxable income.
Other than SALT, the other big changes are a reduction in mortgage interest write-offs—you can now only deduct interest payments from the first $750,000 of your mortgage—but more importantly for us non-profiteers, the percentage of gross income for charitable contributions has been raised from 50 percent to 60 percent. According to H&R Block, this is particularly exciting, as “for the 2015 tax year, 82 percent of taxpayers who itemize claimed a charitable contribution.”
While it’s looking great for taxpayers that aren’t in tax-happy states, it won’t be too good for nonprofits. Because the standard deduction was increased by so much, and the main reason to itemize was capped, it’s projected that 90 to 95 percent of all filers will chose the former method, whereas in years past—as mentioned above—that percentage was a little over 70. The Tax Policy Center estimates that giving will drop anywhere between $12 and $20 billion. It’s important to recognize, that this estimates income trends remain stagnant at their 2017 levels, and even then, it’s a 6 percent decrease at its most.
When combined with changes to the estate tax, we could potentially be looking at a drop of another $4 billion.
Is that it for us then? Not quite. Nonprofits have long needed to reevaluate the way they market fundraising. While we can’t deny many donate to charity simply to get tax breaks, it is scientifically proven that people are more compelled by feelings than finances.
This tax plan isn’t a catastrophe, but rather a catalyst for nonprofits to remember who they are—problem solvers that fix with compassion, not money chasers who see potential donors as pinatas to beat and barrage. I hate to end this little motivational speech on a joke—I’m just kidding, I relish the opportunity—but when the federal government gives you lemons, well, the 8-year old in all of us knows just what they need to do.
Moshe Hecht, winner of the 2017 NonProfit PRO Technology Professional of the Year, is a philanthropy futurist, public speaker and chief innovation officer of Charidy, a crowdfunding platform and consulting company that has helped 3,000 organizations raise over $700 million.
Moshe's passion lies at the intersection of technology and charitable giving. When Moshe is not at the office, he is writing music and enjoying downtime with his wife and three redheaded children.