Donations in Doubt: Tax Reform and the Future of Non-Profits

This past week, Xledger president Nathan McCann sat down to discuss how upcoming tax reform will impact non-profits. With decades of executive experience in non- and for-profit organizations, Nathan currently oversees the provision of best-in-market ERP software to clients from both worlds.

How significant is tax reform?

Tax reform may seem commonplace. After all, the topic comes in every presidential campaign, and the IRS code does change every year. But this impression isn’t quite accurate. In reality, major tax reform has occurred only three times since 1909, including in 1913, when the 16th amendment authorized Congress to collect taxes on income.

Why are we talking about it now?

Last week, the House passed what would be the first major federal tax reform since Reagan in 1986. As we speak, the Senate is preparing to vote on a very similar bill. The House legislation is nicknamed the Tax Cuts and Jobs Act [H.R.1 of the 115th Congress]. It’s actually gone through quite a few iterations over the past decade, and as you could guess from the name, it was designed to stimulate the economy by cutting taxes and creating jobs. But if history tells us anything, the bill will have unintended consequences, both positive and negative.

How do charities figure in?

In the current tax code, many individual donors are motivated by the deduction for charitable giving. According to the Network for Good, 30% of individual online giving takes place in the month of December and 38% of that takes place in the last three days before the end of the year, which is the deadline for tax deductions. We find a clear example in the state of Hawaii, where state legislators capped all itemized deductions (including charitable donations) in 2011. They soon realized that, yes, they were getting an extra $12 million per year. But that increased revenue was costing them $60 million per year in lost donations. As a result, Hawaii’s governor signed legislation in 2013 to remove the limit on deductions for charitable giving.

Of course, most donors don’t give solely because of tax incentives. But the simple truth is that without those benefits, fewer taxpayers would be able and willing to give.

How does the House plan change those incentives?

Based on the text of the House plan, I think we can expect two major changes.
First off, we’ll see a huge decline in number of taxpayers that benefit from charitable donations. The proposed plan does keep a deduction for charitable contributions. It even increases the limit to 60% of AGI. But taxpayers can only deduct charitable giving if they itemize their deductions rather than taking the standard deduction. In the current system, 30% of taxpayers itemize, and those itemizers account for more than 80% of charitable giving. The House plan raises the standard deduction from $6,350 to $12,200 for individuals and $12,700 to $24,400 for married couples, which has the side effect of making it more rational for taxpayers not to itemize.

Estimates suggest that if the proposed changes become law, charitable giving could decline by between 1.5% and 5% each year, meaning an annual reduction of between $4.5 and $14 billion.

The second major change is that the number of legacy gifts will probably drop off significantly. Estates worth up to $11 million per person will be exempt from the federal estate tax, double the current amount. And under the Tax Cuts and Jobs Act, the federal estate tax would go away entirely by 2025. One of the primary reasons that wealthy individuals make donations in their wills is to help avoid these taxes. In 2016, total bequest giving was estimated at $30 billion, or 8% of all charitable giving. By eliminating the estate tax, the House plan could cause a huge decline in legacy giving as taxpayers wake up and realize that it makes more sense to go ahead and give property to children and beneficiaries.

While no one really knows how large the drop-off will be, estimates range from 5% to a staggering 40%.

If non-profits are going to lose that many donations, what does that mean for their future? Is there anything they can do?

Over the past year, I have read hundreds of articles and heard from dozens of speakers on the subject, and most of them have been the disaster and doomsday types. While it’s true that nobody really knows the future, I’m confident that things won’t be anywhere near as bleak as most people say. If non-profit leaders can glean insight from history and from present circumstances, they can take concrete steps to safeguard their organizations. But it’s absolutely imperative that non-profits act now, while the landscape remains somewhat predictable.

What are some actions non-profits can take to prepare?

Well, they can start by communicating. Some donors may cease their giving due to tax law changes, but in most cases, the non-profit’s own lack of communication is the real culprit. Fundraising consultant Jerold Panas reported that, of those who have stopped giving over the past decade, one third forgot they gave a gift (and were not reminded through a receipt or thankful expression), a quarter didn’t feel the organization truly needed the money, and a tenth didn’t feel their gifts made a difference because they received no information about how the non-profit used them.

This ties into another point: non-profits have to learn how to engage donors holistically, how to immerse them in the organization’s vision and mission. Donors who are actively invested in a cause have a much, much higher propensity to give to that cause. For donors who are engaged and aware of their impact, giving is a joyful and rewarding experience. Donors like that are much less likely to stop giving.

It’s also imperative that non-profits focus on their core competencies. Just like every individual performs some tasks better than others, so organizations have strengths and weaknesses. Non-profits will be more effective and efficient when they major in their mission than when they try to do everything. One way to do this is through partnerships. By leveraging the strengths of others, non-profits can focus on core competencies without undermining stewardship.

Non-profits also need to reprioritize stewardship. In recent years, the obsession with fund-raising has clouded many non-profits’ views of stewardship. I’m not at all suggesting that non-profits are wasteful or extravagant, although I’m sure there are some sad examples out there. Rather, I’m suggesting that non-profits have become so enamored of raising money that many have lost sight of how best to steward their assets and resources. Yes, there are fiscal implications here, but the need also extends to the systemic and relational aspects of stewardship. Especially with the challenges they face today, non-profits must put responsibility first in everything they do.

Here’s part of the reason I’m hopeful: non-profits should already be doing everything I’ve mentioned. Rather than adopting new strategies, they simply need to improve their current ones. They need to refine how they communicate and engage with donors. They need to refocus on their strengths, on what they do well. They need to return stewardship to their number one priority.

If non-profits can do that, they can thrive no matter what Congress passes.

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As of the time of this interview, none of these proposed changes have been formally enacted into law. They are merely proposals that may undergo further alteration or not be enacted at all. Views expressed are the opinion of the writer and should not be construed as tax, financial, or legal advice. Such advice should be sought from a professional engaged to serve your organization directly.

At Xledger, we delight in empowering the ambition of non-profits across the globe–from driving efficiency across your enterprise with highly automated ERP solutions to delivering best practice outsourcing. If we can serve your organization in any way, please contact us. We look forward to the dialogue.