The Tax Cuts and Jobs Act ("TCJA"), the most far-reaching reform of the nation's tax laws in over 30 years, went into effect in 2018. Unfortunately, nonprofits were among the biggest losers under the new law. The main provisions of the TCJA affecting nonprofits are discussed below.
The TCJA retained the tax deduction for charitable contributions, which has been part of the tax code for almost 100 years. In fact, it enabled taxpayers to contribute more and take a deduction. Under prior law, taxpayers could not deduct more than 50% of their adjusted gross income in charitable contributions. The TCJA increased this limit to 60%, which helps wealthy donors to give more each year.
However, taxpayers may deduct charitable contributions only if they itemize their personal deductions instead of taking the standard deduction. If you don't itemize, you get no deduction. Itemizers are far more likely to donate to charity than nonitemizers. 83% of itemizers report giving to charity compared with only 44% of nonitemizers. Non-itemizers contribute less than 20% of total charitable giving.
A taxpayer should itemize only if his or her personal deductions exceed the standard deduction. As a result of the TCJA, far fewer taxpayers are able to itemize than ever before. This is because the TCJA roughly doubled the standard deduction. For 2019, the standard deduction is $12,200 for single taxpayers and $24,400 for marrieds filing jointly. At the same time, the TCJA eliminated or curtailed many valuable itemized deductions.
As a result of these changes, only about 12% of all taxpayers are able to itemize, down from 30% in 2017 and earlier years. This in turn has resulted in fewer taxpayers claiming the charitable deduction. IRS data shows that the number of taxpayers who itemized their personal deductions and claimed a deduction for charitable contributions for 2018 (the first year under the new TCJA rules) declined by about 20 million over the prior year. As a result, taxpayers itemized $54 billion less in charitable contributions compared to the previous year. This had a negative impact on giving. According to the annual Giving USA report, total charitable contributions for 2018 fell by 1.7% from the prior year (adjusted for inflation). Giving by individuals dropped by 3.4%. This was the largest decline since the 2008 financial crisis.
Smaller donations took the biggest hit during 2018. Donations under $250 declined by 4.4% while those between $250 and $999 went down by 4%. The number of donors also fell, as did retention rates.
High income earners who itemize continue to have a strong tax incentive to contribute: The top 1% of households now gets 56% of the benefit of the itemized deduction for charitable donations, up from 38% before the TCJA took effect. 2018 donations of $1,000 or more by high income donors were up 2.6% over 2017.
The TCJA also reduced the number of taxpayers subject to the federal estate tax. For 2019, estates worth up to $11.4 million per person ($22.8 million per married couple) are exempt from the federal estate tax, more than double the amount in 2017. One of the main reasons wealthy individuals make charitable bequests in their wills is to help avoid estate taxes. Charitable bequests are not subject to this tax. With fewer taxpayers subject to the estate tax, there is less incentive to make charitable bequests. As a result, giving by bequest for 2018 declined by 2.3% over the prior year.
Subject to numerous exceptions and exemptions, tax-exempt nonprofits that operate businesses unrelated to their charitable mission must pay an unrelated business income tax (UBIT) on their net unrelated business income. Under prior law, a nonprofit that operated multiple unrelated businesses could deduct the losses from one business from the profits from another to determine the amount of net unrelated business income subject to UBIT. The TCJA does not allow this. Starting in 2018, each unrelated business must determine its net income without regard to losses from other unrelated businesses. As a result, it's likely that more nonprofits will have to pay UBIT. Many nonprofits are attempting to get rid of money-losing businesses.
The TCJA also contained tax changes that adversely affected colleges and universities. Private colleges and universities with at least 500 students and endowments worth at least $500,000 per full-time student are subject to a 1.4% excise tax on their net investment income. Only colleges and universities with fairly large endowments are subject to this tax. For example, a college with 5,000 full-time students has to pay the tax only if its endowment exceeds $2.5 billion.
In addition, donors are no longer allowed to deduct as a charitable gift 80% of the cost of purchasing seat licenses to purchase tickets at college and university athletic events.
Nonprofit employers are also required to pay a 21% excise tax on amounts paid to employees over $1 million. A similar requirement has been in place for many years for for-profit corporations. However, payments for medical services provided by doctors, nurses, and veterinarians are not subject to the tax.