While many organizations finished 2016 calling for donors to contribute before year-end “while the contributions still matter,” you should be reassured that all hope is not lost in 2017 because of proposed tax law changes that may or may not be enacted before year-end. We will need to wait and see as to whether the estate and gift tax is eliminated or the itemized deductions are capped. However, organizations can address the following areas now to hedge a possible drop in contributions resulting from any tax policy change.
First, utilize Form 990 as a way to educate donors and market your organization to potential board members and grant-makers. By refining the narrative sections of Form 990, the return will aid readers in clearly understanding the impact your organization has. In addition, a clear narrative using quantitative data will aid in conveying to readers how many people your organization affected. This is a clearly under‑utilized point, as donors are always concerned with where the money they give goes. Nonprofit rating sites such as Charity Navigator are beginning to include “results reporting” in their computations, reinforcing the importance of quantitative information in the narrative. Even with a refined narrative, Form 990 should not stand alone as a marketing tool. Combined with other materials, Form 990 should convince donors and grant-makers that your organization is worthy of their contributions.
Additionally, organizations can promote current tax incentives such as qualified charitable distributions (QCD) from an IRA. In 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently allowed individuals 70½ or older to make a tax-free distribution up to $100,000 of otherwise taxable amounts directly from an IRA to a qualified nonprofit. Instead of a donor receiving a potentially limited deduction capped at 50 percent of adjusted gross income, that may or may not be fully utilized had the cash been distributed to the donor and then contributed to the organization, 100 percent of the amount is excluded from the donor’s taxable income when transferred directly to a qualified nonprofit organization. Reducing taxable income is always beneficial to a taxpayer, whether or not the individual tax rate fluctuates under a new tax policy.
Lastly, promoting planned giving is another way to hedge possible short-term fluctuations in tax policy. Through planned giving, donors can establish charitable remainder or charitable annuity trusts that will allow the donors to receive annual income that, under proposed plans, would be taxed at a lower rate than in the past, while still being able to capitalize on a contribution to the nonprofit organization as the tax code is written today. Also, charitable lead trusts (CLTs) allow donors to transfer property to non-charitable beneficiaries after a fixed period of time while providing income to a nonprofit organization. This would allow donors to hedge against another future change in the estate and gift tax.
Predicting if and when Congress will pass a tax law overhaul is like predicting how the next hurricane season will play out. However, if the forecasters are correct, these items will help increase the visibility of your organization and assist in hedging against a potential drop off in contributions.