How Will Nonprofits Change with the New Tax Law?

The mad sprint to pass the tax bill late last year left me puzzling over how anyone could know all the implications. Now, as I sit down to tackle those dreaded tax returns, I wonder: “how much might be different in this process a year from now?”

For nonprofit organizations, that answer may well be: plenty.

Until this year, donations to charitable organizations—those with the federal 501c3 status— enjoyed the double benefit of supporting a cause while also reducing the amount of tax owed by the taxpayer. Like much of the former tax code, this was a benefit for the middle class on up. Low-income households, who typically are not homeowners with tax-deductible mortgage interest, did not have enough in deductible expenses to make it worth taking the itemized deduction path and instead claimed the standard deduction.

With the new tax law, the Joint Committee on Taxation estimates that most middle class taxpayers—those earning between $50,000 and $200,000—will not take the charitable deduction anymore.

28 million fewer taxpayers claiming the charitable deduction.

Will that mean that nonprofits will see 28 million fewer gifts? Most contributions to charities come from individuals. The National Center for Charitable Statistics reported that the average total charitable deduction in 2011 was $1,201. That could add up to over $3.3 billion less funding for a sector that by many reports has high numbers of financially struggling members.

I am no tax advisor. I also can’t predict whether Americans will continue to support their favorite charities out of the goodness of their hearts. Some will chalk up this uncharted territory to testing just how authentically charitable Americans are when their pocketbooks don’t benefit.

It’s a lot to test all in one year.

I can see a few possible outcomes:

  1. Giving levels won’t crash–this year— because middle-class taxpayers won’t realize how the tax bill changed these deductions until they sit down to do their taxes next year.
  2. Middle class donors will rally and sustain the causes they care about, eliminating $1,200 dollars in other expenses instead. Less eating out? Staycations?
  3. Donors will skew towards the wealthy, most of whom will continue to itemize deductions with the continued tax deduction benefit from their charitable donations.

In the third scenario, it is of course possible that wealthy donors could fill the void left by the middle class donors.

But will funding priorities change?

Does a million dollar gift—or the promise of steady gifts from a millionaire—run the risk of changing a nonprofit’s mission, priorities, or programming?

Will it matter to be an official nonprofit, with that 501c3 tax-exempt status? Some nonprofits may decide that the rationale for becoming a nonprofit, or maintaining nonprofit status, does not outweigh the complex governance and financial reporting requirements.

If today’s potential, non-wealthy donors are motivated by cause alone, then they may redirect their dollars to political organizations or social enterprise groups or the local neighborhood association: groups with a cause, but without a 501c3 tax exempt status.

……

We don’t really know how much the charitable deduction motivated people to give. In this transition year, we should hope that worthy nonprofit organizations stay afloat. We should hope that a larger share of donors coming from the wealthy ranks does not distort charitable priorities or programming.

More than ever, charities will need to tell their stories well.