By Jaimie Julia Winters
Not-for-profits are dealing with a sea of confusion when it comes to the new tax laws passed in December. Groups are not only concerned with a decrease in individual donations, but also the potential loss of a tax-exempt status on some fundraising income.
In an effort to ease tax filing and increase deductions, the new tax law nearly doubles the standard deduction amount and requires no reporting of line-by-line deductions.
Taxpayers will see their standard deductions increase to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples for their 2018 taxes. Prior to the new tax law, about 30 percent of taxpayers itemized, attempting to rack up more deductions, one of which was charitable contributions. Itemizing is expected to drop to 5 percent with the increase in the standard deduction amount, according to the Tax Policy Institute. Since charitable contributions of $250 or more have always been an itemized deduction, not-for-profit directors are concerned that less people will give.
The fear of the new tax law causing a decline in donations could have a reverse effect on some organizations, however the Rev. Scott Sammler-Michael of the Unitarian Universalist Congregation at Montclair said the church has seen a 10 percent increase in giving this year although the membership has remained the same.
Income raised through fundraising will now come under closer scrutiny by the IRS as well. Not-for-profit directors are concerned with what is now considered unrelated business income — which is taxable — and the changes in reporting of this income. The IRS has yet to release guidance on the reporting changes.
“We are basically taking a wait and see attitude,” Montclair History Center Executive Director Jane Eliasof said about donations. “That said, most of our donors are committed to our mission — preserving, educating others about, and sharing Montclair’s history. They also understand the importance of understanding the past to shape the future.”
This falls in line with what the National Council of Nonprofits is advising. Council Resource Development director Amy Silver O’Leary said groups should focus on the impact they have on the community, getting that message out and fostering good relationships, with the hopes that people give to a cause or group not due to a deduction, but because they see the group’s tangible effect on residents or feel a connection to its mission.
Council President Tim Delaney suggests that not-for-profits meet with their boards to come up with a long-term plan to diversify revenue streams as fundraising will be more important than ever.
While some not-for-profits will increase fundraising efforts, the IRS has stepped up review and enforcement of unrelated business income of $500 or more.
When tax-exempt nonprofits earn income through an activity that is unrelated to their exempt purposes, such as activity that is commercial in nature, like sales of goods and with an activity that is regularly carried on, the revenue from that activity may be taxable under IRS rules for unrelated business income taxation. Because tax-exempt organizations generally operate for charitable purposes, most income they receive is exempt from tax under the Internal Revenue Code. However, income-producing activities that are considered to be unrelated to their exempt purposes may result in taxable income. Income derived from exclusive corporate sponsorships, rentals that offer kitchen and bar services, some gift shop sales and church bulletin advertising sales, for instance, are generally considered taxable. While thrift shop sales of or fundraisers with donated goods, bake sales with volunteer-created goods and bingo earnings could be exempt.
The council is recommending that all fundraising income be carefully recorded on the organization’s 990T form.
The UUCM’s main fundraiser, that brings in five percent of its income and is currently tax-exempt, is an example of fundraising the IRS could scrutinize in the future. The event, a services auction held the Saturday before Thanksgiving, offers unique events and experiences for event goers to bid on.
“These are experiences that are hard to put a value on. They are worth what someone is willing to bid on,” said Sammler-Michael.
Other income at the church is generated from facility rentals to both not-for-profits and for profits. Sammler-Michael said paying taxes on the for-profit rentals is not a problem, as it still generates income for the church.
“However, since it’s already half way through the year, it would be nice to know how the tax situation is going to affect us so we could adjust our fee structure if necessary,” Sammler-Michael said.
Another area that has some organizations concerned is another deduction — claiming a home office for those who work remotely and other work-related expenses. Organizations feel they may have to come up with other financial incentives for employees who work remotely, which could put a financial drain on the organization, said Delaney.
Employee incentives such as providing housing for leadership, meals, gift card and tickets to a show as awards, and commuter costs will now be considered income and taxable, as well.
Overall not-for-profit directors are concerned with spending cuts that could bring down government funding of programs in socials services and the arts.