As U.S. corporations and businesses reap benefits from the passage of the Tax Cuts and Jobs Act of 2017 in December, state and national nonprofits across Arkansas are still trying to figure out how emerging federal and state tax policy will impact the way charities operate and carry out their benevolent missions.
For many 501(c)3 organizations, the enacting of President Donald Trump’s $1.5 trillion tax reform package has become an area of major concern as nonprofit executives and policymakers look to interpret changes in the nation’s tax code that allow them to remain exempt from paying federal income taxes.
At the same time, the Arkansas Tax Reform and Relief Task Force is reviewing several sales and income tax exemptions for nonprofits, including a lengthy list of recommendations to possibly repeal going into the 2019 legislation session.
According to David Thompson, vice president of public policy at the Washington, D.C.-based National Council of Nonprofits, charity-minded organizations are not only facing the uncertainty of new federal tax changes that don’t have clear guidelines, they also face challenges from budget-conscious lawmakers at the local and state level who see nonprofits as a new source of revenue.
“We are facing an unprecedented tsunami of [challenges] that we never had before,” Thompson said in an interview with Talk Business & Politics.
In the January edition of The Chronicle of Philanthropy following the passage of the Trump administration’s omnibus tax legislation, Thompson and National Council President and CEO Tim Delaney wrote that nonprofits must move swiftly to fight for sound public policies that impact mission-minded, charitable organizations.
“The destructive tsunami the new federal tax law unleashes is about to pound the nation’s nonprofits and foundations,” wrote the National Council executives. “The law that Congress passed, and the president signed in the waning days of 2017 has created the most dangerous policy environment across the state, local and federal levels that we’ve ever seen in the decades we’ve spent focusing on how governments and nonprofits interact. That may sound like hyperbole. It is not.”
Besides facing a tidal wave of new tax policy mandates, Thompson said charitable and philanthropic groups were able to successfully block passage of key proposals in the 560-page tax reform package. Two proposals that caused the most anxiety included a plan to repeal the authority of nonprofits and colleges to issue tax-exempt bonds for building projects and another proposal to rescind the so-called Johnson Amendment that barred nonprofits from engaging in partisan politics.
LOSS OF GIVING, NON-PROFIT JOBS
Still, Thompson said there were enough measures in the deficit-busting Republican tax plan to cause enough worries for years to come. The biggest challenge charities now face, he said, is the doubling of the federal standard deduction that began in fiscal 2018.
Before Congress passed the tax cut bill in December, the charitable deduction was only available to the roughly 35% of filers who itemize their tax returns. Now nonprofit experts estimate that 90% to 95% of all taxpayers will not itemize their returns, thus walling off the charitable deduction from all but 5% to 10% of all filers.
“When and where those shortfalls will hit are uncertain. It might take a full year or two to grasp the consequences,” said one National Council policy expert.
To substantiate those fears, Thompson and other industry experts point to recent studies by Indiana University’s Lilly Family School of Philanthropy and the Washington, D.C.-based Tax Policy Center that estimates changes to the federal standard income tax deduction will reduce annual charitable giving in the range of $12 billion to $20 billion.
“As a result of the change, the charitable deduction would be out of reach of more than 87% of taxpayers,” Thompson said, noting a joint congressional panel said fewer itemized deductions will add $95 billion in U.S. tax revenue. “Not all of this would disappear. The change is estimated to shrink giving to the work of charitable nonprofits by $13 billion or more each year. Estimates are that this drop in giving would cost 220,000 to 264,000 nonprofit jobs.”
FRINGE BENEFIT HITS
Besides the standard deduction, which touches nearly every taxpayer, the National Council also highlights changes to the unrelated business income tax, known as UBIT, that will impact certain nonprofits that conduct “business-like” activities. For example, Thompson said, if a nonprofit engages in a money-making business that is unrelated to its charitable purpose, then the IRS could impose a tax on that activity.
One provision in the UBIT also taxes fringe benefits nonprofits offer to employees. Now, Thompson said, employers that provide some qualified benefits not included in an employees’ taxable income — such as transit passes, van pooling, free parking, gym memberships and commuting or biking reimbursements — must include the value of those perks in the nonprofit’s annual 990 tax return.
Just last month, the IRS published new Form 990-T instructions on unrelated business income for tax exempt organizations for fiscal 2018, but some top nonprofit trade organizations are requesting clearer guidelines from the U.S. Treasurer before those rules are implemented.
“We have a lot of concerns and questions about the UBIT rules and have asked the Treasury Department to delay implementation at least a year,” Thompson said. “There are a lot of confusion and compliance challenges that could result in nonprofits [re-filing] their taxes again, which can be expensive and frustrating.”
The National Council and other nonprofit trade groups, such as the Independent Sector and the Alliance for Strong Families and Communities, cite at least a half-dozen other measures in the Trump administration’s tax package that will impact charitable organization. Some of the more notable measures include a 21% excise tax on charities that pay top executives over $1 million in annual compensation and a 1.4% tax bounty on private universities and colleges with investment income from activities not part of the school’s educational mission.
Nonprofit policymakers also predict a proposal to double the exemption of the estate tax to $11 million for individuals and about $22 million for couples that will reduce federal revenues by nearly $100 billion over the next decade and cut charitable giving annually by $4 billion. Thompson said nonprofits will have to bear much of the billions of dollars of costs for the estimated 13 million people who will lose healthcare coverage following repeal of the individual mandate in the Obama administration’s Affordable Care Act that was included in the Republican tax bill.
ARKANSAS TAX REFORM PROPOSALS
The 16-member special tax reform task force, created to review and overhaul Arkansas’ unwieldy tax code as a part of Gov. Asa Hutchinson’s 2017 tax cut legislation, is also looking to pare sales and income tax exemptions for Arkansas nonprofits and churches.
A key recommendation the tax panel is reviewing is a sales tax exemption for nonprofit hospitals, sanitariums and nursing homes, which the state Bureau of Legislative Research estimates would result in a $68.5 million boost to state revenue if repealed.
Another proposal on the table for review is a list of “named nonprofits” that are exempt from paying sales taxes. That list includes well-known Arkansas charities such as the Heifer Project International, Habitat for Humanity, the Salvation Army and the Humane Society, to more obscure nonprofits like the Poets Roundtable of Arkansas and the Fort Smith Clearing House.
The income tax recommendation that by far would have the most impact on nonprofits is a proposal to repeal or raise Arkansas’ standard income deduction of $2,200 or implement a hybrid of both proposals. According to the state’s fiscal impact analysis, a plan to disallow itemized deductions and raise the individual income tax exemption to $2,500, would increase state revenues by $185.6 million.
Those proposals, Thompson said, offer the same fears that are engrossed in the federal tax bill — that taxpayers who don’t receive a benefit from charitable giving will give less.
However, Jeremy Horpedahl, assistant professor of economics at the University of Central Arkansas’ Center for Research in Economics, said those fears are not well-founded. Horpedahl co-authored a book on Arkansas tax policy with Nicole Kaeding of the Tax Foundation, the conservative Washington, D.C.-based think tank that has drafted a blueprint for overhauling the state’s tax code.
“Nonprofit organizations currently receive a number of tax exemptions under both federal and Arkansas law,” Horpedahl said. “Changes in tax law which adversely impact nonprofits will naturally cause them to worry, but even with the recent changes, nonprofits continue to receive a wide variety of tax preferences. Some individuals may donate less to nonprofits with changes in federal tax law to itemized deductions, but many individuals donate even though they get no tax benefit.”