MCN Releases FAQ of 2018 Federal Tax Law Changes Affecting Nonprofits

These ten questions provide a brief overview of the major changes impacting nonprofits and charitable giving: changes in income & estate taxes that may impact charitable giving, and issues related to taxes nonprofits pay & remit as employers.


GENERAL OVERVIEW


1. When will the Federal Tax Cut and Jobs Act go into effect?

Many of the changes to the federal tax code passed on December 20, 2017, take effect with the start of the 2018 Tax Year on January 1, 2018, including changes in corporate and individual tax rates, and the increase in the individual standard deduction.


2. When will we know what kind of effect the new federal tax law is having on charitable giving?

2018 individual income tax returns will not be due until April 15, 2019, and then cumulative reported effects of the changed tax laws will not be evident until late 2019. Giving USA, the most widely used comprehensive report on philanthropy, published annually by the Giving Institute, will report on 2018 numbers in mid-June 2019. Individual organizations will likely be able to share some information on how their level of contributions are changing under the new tax code.

Join MCN in June 2018 for a workshop focused on charitable giving. The workshop, with nationally-respected philanthropic leader, Kim Klein, will focus on Fundraising in Weird Times: How to Increase Your Individual GivingJune 6, Minneapolis.

3. How will the tax bill effect the amount of individual charitable giving in Minnesota?

  1. The federal tax code will continue to allow an itemized deduction for charitable contributions, but because of other changes in the tax law, fewer people are likely to itemize. According to the Tax Policy Center, about 11 percent of U.S. households are projected to itemize deductions, down from 26 percent under the prior law. In Minnesota, the Department of Revenue has projected that 13 percent of Minnesotans will itemize deductions, down from 36 percent. Many nonprofit organizations are concerned about the potential impact of fewer donors itemizing, and therefore fewer with a direct federal tax benefit for charitable giving.
  2. Several national organizations have attempted to estimate how the reduction in the number of taxpayers itemizing their deductions will reduce contributions. Some overall estimates project about a 5 percent reduction in individual charitable contributions. (Of course, donors contribute because of the cause they are supporting, not solely for the tax savings, making it difficult to predict how individuals will adjust their contributions based on tax changes. After the last previous major tax overall, in 1986, billions in charitable contribution reductions were predicted but did not occur.)
  3. Minnesota taxpayers who do not itemize deductions on their federal income tax return may subtract a portion of their charitable contributions on their state income tax return. Minnesota’s charitable deduction, also known as the non-itemizer charitable deduction, provides a tax deduction of 50 percent of total charitable contributions over $500. Contributions to any 501(c)(3) organization are eligible for the deduction including all public charities and churches/faith organizations. Coupling Minnesota’s Charitable Deduction with Minnesota’s long tradition of giving and volunteering puts Minnesota in a better position than most other states. Learn more about the Minnesota’s Charitable Deduction here.
  4. The tax bill increased the charitable giving limits for taxpayers who itemize deductions from the current cap of 50 percent of adjusted gross income (AGI) to 60 percent of AGI. This change will enable higher income taxpayers to deduct a higher percentage of their overall income for contributions to charitable nonprofits in 2018.
  5. The incentive to make major charitable bequests will be reduced as a result of the Federal Estate Tax threshold doubling to $11 million single/$22 million couple, indexed, with the tax rate staying at 40 percent. (Minnesota’s state estate tax threshold increased from $2.1 million in 2017 to $2.4 million in 2018, with a top tax rate of 16 percent)

 

4. How are Minnesota organizations adapting their fundraising communications under the new tax law?

For the most part, the communication objectives and messages remain the same as before the law was changed – which is to provide persuasive information on the achievements and goals of the organizations seeking contributions. Charitable organizations with 501(c)(3) status can continue to communicate that contributions are tax deductible, and can inform their donors of the Minnesota Charitable Deduction.

5. Will this tax bill impact corporate or foundation giving?

There were no changes that directly affect private foundation contributions; they will still be subject to a 5 percent payout requirement and be subject to a 1-2 percent excise tax.

Reduction in the corporate income tax from 35 percent to 21 percent reduces the tax incentives for corporate charitable giving, though corporations have many considerations in deciding contribution levels. A number of public spirited Minnesota corporations have for years set their contributions budget to a fixed 2 percent or 5 percent of their pretax profits (such as through the Keystone program), and so would likely continue at this level. This will be an area the Giving USA study will be watching and report on later.

6. How has the unrelated business tax (UBIT) calculation changed?

Nonprofit organizations are required to pay a tax for income generating activities unrelated to their charitable mission, by reporting these activities and calculating the tax on IRS Form 990T.

Unlike the 2017 UBIT calculation where all income was applied to all expenses, beginning in 2018 each line of business will report its own income and expenses, and calculate the taxable amount for each business line.

Tax law changes how nonprofits report unrelated business income and losses and how they can utilize net operating losses in connection with it. What are these reporting changes? The IRS has not yet released guidance. Organizations filing 990T forms (Exempt Organization Business Income Tax Return) will need to track activities, lines of business, and where business losses originate to comply with this new provision, in active consultation with their tax and audit professionals.

7. How will the new tax law affect employee withholding?

The new individual tax rates will mean that many individuals will see changes in the amount of federal taxes they owe, and so may want a different amount withheld from their income for federal taxes. US employers are required to withhold income taxes from employee payrolls, and the IRS provides tables to help employers know the proper amounts for withholding. Additional updates will be posted by the IRS here and MN has withholding form is available here. Most employees will see a small reduction in federal tax withholding starting in February, implemented by their employer based on the new withholding tables.

8. How will employee transportation benefits be affected?

The new tax code makes changes to transportation benefits – payments nonprofits might make to help employees with transportation. Under the new law, if the nonprofit organization makes payments directly on behalf of the employee, they can be penalized. A nonprofit can still provide support through pre-tax qualified plan and reimburse expenses. Organizations should examine their policies to see if they need to change the way they provide this benefit.

9. What tax decisions will the State of Minnesota need to make in response to the federal tax bill?

Minnesota’s individual income tax and corporate tax systems use federal tax law in many ways as their starting points, so when there are federal changes, state policymakers need to decide whether and how to adapt the state tax code to reflect those changes. Those decisions will be discussed in the 2018 Legislative Session, which starts in mid-February and ends in mid-May 2018. There decisions may impact the amount of state taxes households and corporations pay and state tax incentives for charitable giving.

10. How will nonprofit budgets be affected by the 21 percent excise tax on highly compensated employees?

The new tax code requires nonprofit employers (other than hospitals) to pay a special 21 percent excise tax for salary in excess of $1 million a year for the top five individuals. (Very few nonprofit employers compensate at this level to be affected by this provision, though a number of colleges and universities will be.)

11. For further information

See MCN’s website (www.minesotanonprofits.org) for updates, tools, and our upcoming training schedule. You can also join networking groups facilitated through MCN around fundraising, HR, finance, or communications.

For information on fundraising or development, please contact Kari Aanestad, development manager, at kaanestad@minnesotanonprofits.org. For information on policy, contact Rebecca Lucero, policy director, rlucero@minnesotanonprofits.org. For information on educational workshops and trainings, contact Paul Masiarchin, program director, pmasiarchin@minnesotanonprofits.org.

 
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