What Can Nonprofits Expect from Future Federal Tax Policies?

The future of nonprofit organizations under potential new tax policies has been a subject of extensive discussion and analysis. As nonprofits play a pivotal role in serving communities and advancing social causes, understanding potential changes to tax policies is crucial for effective planning and strategy formulation.

Context of current tax policies

The Tax Cuts and Jobs Act (TCJA) of 2017 stands as one of the landmark legislative accomplishments of recent U.S. tax reforms. This comprehensive tax overhaul aimed to simplify the tax code, reduce corporate tax rates, and provide tax relief to individuals. While the TCJA had several implications for nonprofits, many of its provisions are scheduled to expire at the end of 2025. With a new administration entering the White House, elements of the TCJA could potentially be extended or new tax policies proposed in the coming months — so it’s imperative to anticipate what future tax policies might entail.

Key TCJA provisions impacting nonprofits

The TCJA had significant implications for nonprofits, including:

• Standard deduction increase: The increase in the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly led to a reduction in the number of taxpayers itemizing deductions, which consequently impacted charitable giving.
• The TCJA significantly changed the corporate income tax rate from a graduated rate structure with a top rate of 35% to a flat rate of 21%. This change applied to all corporations, including those that are tax-exempt but have unrelated business taxable income (UBTI).
• Section 512(a)(6) requires nonprofits to calculate UBTI separately for each unrelated trade or business. This means losses from one unrelated business activity cannot offset income from another unrelated business activity.
• Section 512(a)(7) imposed a tax on nonprofits for certain fringe benefits provided to employees. Ultimately, 512(a)(7) was retroactively appealed for nonprofits.
• Excise tax on executive compensation: A 21% excise tax was introduced on compensation over $1 million paid to the top five highest-paid employees of nonprofit organizations.

Potential future changes to tax policies

Looking ahead, future tax policies could encompass further reforms aimed at reducing taxes and stimulating economic growth. However, these changes could have both positive and negative implications for nonprofits.

Possible impacts on charitable giving

One primary concern for nonprofits is the potential impact on charitable giving. If future tax policies continue to favor standard deductions over itemized deductions, nonprofits might witness a continued decrease in charitable donations. This is because fewer taxpayers would have an incentive to itemize, thereby diminishing the tax benefits associated with charitable contributions.

Changes to tax-exempt status

Another potential change is the criteria for tax-exempt status. Future policies might tighten regulations around what qualifies an organization for tax-exempt status, potentially leading to more rigorous scrutiny and compliance requirements. Nonprofits may need to allocate more resources to maintain their tax-exempt status and adherence to new regulations.

Corporate tax rates and foundation giving

If future tax policies continue to lower corporate tax rates, this could influence the giving patterns of corporate foundations. Lower taxes might result in higher profits for corporations, potentially increasing the funds available for charitable contributions. Conversely, reduced tax incentives for corporate giving could lead to a decline in donations from corporate foundations.

Unrelated business income tax (UBIT) adjustments

Adjustments to UBIT regulations could also be on the horizon. Future tax policies might seek to expand the scope of UBIT or introduce new categories of taxable income for nonprofits. This could result in additional tax liabilities for organizations engaging in revenue-generating activities outside their primary mission.

Changes to the Inflation Reduction Act tax credits

Future tax policies might propose eliminating the green energy tax credits provided by the Inflation Reduction Act (IRA). The IRA offers refundable tax credits for energy-saving capital projects, which can be claimed by colleges, universities, and other nonprofits. Under new policies, nonprofits may be at risk of losing significant cost savings with these green energy tax credits.

Strategic considerations for nonprofits

Given the potential for significant changes to tax policies, nonprofits should consider several strategic actions to prepare for the future:

Diversifying funding sources

To mitigate the impact of potential decreases in charitable giving, nonprofits should focus on diversifying their funding sources. This could include exploring alternative revenue streams such as grants, partnerships, and earned income activities. By reducing reliance on individual donations, nonprofits can build a more resilient financial foundation. However, if the new revenue streams are unrelated to the organization’s exempt purposes, possible corporate structuring, including the formation of for-profit subsidiaries may be necessary to preserve the nonprofits exempt status.

Strengthening donor engagement

Deepening relationships with existing donors can help sustain charitable giving even in the face of changing tax incentives. Nonprofits should prioritize donor engagement strategies emphasizing the impact of their work and the importance of continued support. By fostering a strong sense of connection and commitment, nonprofits can encourage sustained giving regardless of tax policy changes.

Enhancing financial management

Effective financial management is essential for navigating potential tax policy changes. Nonprofits should invest in robust financial planning and management practices to facilitate adaptability to new regulations and tax liabilities. This includes staying informed about potential policy changes and seeking professional advice to elevate tax strategies, such as corporate restructuring.

Advocacy and policy engagement

Nonprofits can also play an active role in shaping future tax policies by engaging in advocacy efforts. By collaborating with sector associations and participating in policy discussions, nonprofits can influence the development of tax laws affecting their operations. Engaging policymakers and raising awareness about the importance of favorable tax policies for the nonprofit sector is crucial for maintaining a supportive legislative environment.

How we can help

The future of nonprofit organizations amid evolving tax policies remains uncertain, with potential changes that could significantly impact charitable giving, tax-exempt status, and overall financial health.

CLA’s nonprofit industry professionals monitor these developments closely. We can help your organization adapt to policy changes by proactively addressing challenges and finding opportunities to strengthen your financial situation.