American nonprofit organizations will foray into mostly uncharted territory this year thanks to the new tax laws that may significantly impact a variety of nonprofits. Here is a breakdown of a few of the main provisions of the bill and its possible impact on a nonprofit’s capacity to do good.
Increasing and Decreasing
It remains to be seen if charitable contributions will fall this year, but the increase in the standard deduction amount will see a sharp decrease in Americans itemizing on their taxes. That could mean a dip in donation amounts. Likewise, a decrease in the estate and gift tax deductions may mean that high-worth individuals have less disposable money to make significant donations to nonprofits.
The $10,000 cap on the state and local tax (SALT) deduction will leave some owners of high-worth real estate states with a higher tax bill. This will mean that many will not have as much cash on hand to donate to their favorite charity.
Burdening Unrelated Businesses
Unrelated business ventures that generate income for a charity are facing increased taxation. Now, the losses from unprofitable unrelated businesses will not be able to offset profits from other unrelated business ventures of the charity. A caveat to this is that this year’s loss could get used as an offset for the profits of the same unrelated business in a later year.
Private nonprofit colleges and universities will now face paying excise on substantial endowments. The one point four percent tax will apply to institutions with at least 500 students and endowments above $500,000 per student.
Removal of adjusted gross income limits with the repeal of the itemized deduction limitation could be a positive sign for nonprofits. This removal could free up some extra funds from high earning individuals that are not as impacted by the SALT limit.
A strategically-thinking nonprofit will want to minimize exposure to activities that will negatively impact their bottom line. Consultation with a legal firm experienced in taxation law should be a top priority to plan for the new financial landscape ahead.