The New Nonprofit Tax Laws for Dummies, Part 1

Okay, it’s confession time —I’ll go first. I consider myself to be a pretty bright guy; not Bill Nye the Science Guy smart, but more like Mr. Rogers smart (and not because I talk to puppets—I don’t). The thing that I struggle with though, to put it lightly, is a very challenged attention span.

You’ll just have to trust me when I tell you that when you’re having a conversation with me, I deeply care about what you’re telling me, I really do, but my wayward mind can’t help but drift to the “Great Beyond.” You can be talking directly at me, but I’m thinking about how if I sell one of my lesser needed organs and get my nephew to lend me his bar mitzvah money, I can finally buy the new Tesla Model 3 I’ve been ogling for the better part of the last three years.

Despite the reality of how cool that would be—and how I could totally make it happen—I have to continually remind myself to remain focused on both simple and complicated topics, the latter, of course, to a greater extent. With that challenge, however, comes a great opportunity... mastering the skill of simplification.

Understanding the New Tax Code

Which brings me to one of the most difficult concepts that nonprofit leaders have been trying to comprehend in the last few months, yup, you guessed it: the massive mess that is the new tax code. As such, if you’re like me, then this article is perfect for you. I’m going to be breaking it down so that even an 8-year old would be able to understand it. I apologize if there are any 7-year olds that feel discriminated against upon reading this—I value all my readers and their impeccable taste in nonprofit authors.

Before I get into nitty-gritty and confusing terminology, I’ll lay it all out with an easy and relatable 8-year old analogy. I want you to think back to your childhood days real quick for this one: what is the best way for a kid to make money during a particularly sweltering summer? Why, running a lemonade stand, of course!

You gleefully pitch the idea to Mom, and she agrees to buy you all the supplies you need, but like a typically dastardly parent, the help comes with a catch. See, Mom knows that the last thing you want to do during summer vacation is practice your math, so she pitches you a deal you can’t refuse: She’ll buy you everything on the condition that you give a percentage of what you make back to her for your “College Fund.” You protest and protest, shouting out anything that comes to mind, “It’s not fair!” and “Taxation is theft!” but it’s no use. You begrudgingly agree, and at a ripe early age, begin to experience the crushing disappointment that comes hand-in-hand with tax season—thanks Mom!

To break the immersion for a moment, the money you make—and that from which Mom takes—is what’s known as taxable income.

As the summer drags on and paydays come and go, you toss and turn in your sleep, dreaming 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 a deal, one with two equally tantalizing choices.

She agrees that she may have been taking a bit too much from you, but she isn’t going to directly reduce the amount she takes from you. No, that would be far too easy and frankly, diminish the educational value. Instead, she graciously allows you to do even more work, and effectively “take” money out of the amount she takes from. What does this mean? Well, let’s pretend that 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’s letting you “hide” some—say, $5—so now when she grabs 10 percent, she’ll only walk away with $1.50. In the real world, these are called deductions.

Two choices given were these: either you can take a set, static amount like $5 out 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.

Stay tuned for part 2...