Nonprofits brace for decision on charitable tax deductions
How big a financial hit nonprofits would take if charitable tax deductions were reduced, capped or eliminated is debatable.
Whether nonprofits think they would take a hit, however, is clear. They think they would, and they are not in a position to weather it well. As the idea reappears at each budget battle, nonprofits have been repeatedly urging legislators to reject it.
Nonprofits lost one round in the law that forestalled the January sequester, which reinstated the Pease Limitation that affects individuals earning more than $250,000 a year and couples earning more than $300,000 a year. But as the March 1 sequester loomed and budget negotiations continued, nonprofits began a new round of lobbying against any further changes.
At press time, no agreement had been reached on the March cliff, but Joe Geiger, executive director of the Pennsylvania Association of Nonprofit Organizations, said he expected the issue to run at least through the duration of the sequester saga.
PANO doesn't think charitable tax deductions inspire a lot of donations, Geiger said; a big portion of charitable donations come from people who don't even itemize deductions on their tax returns.
"But for those best equipped to give to charities, it has served as an incentive to give more," Geiger said. "There are people who would rather give to a charity than more tax revenue to government."
Those people tend to donate to certain causes, which could be disproportionately affected by a change in the deduction.
"Your arts, your theaters, your museums, your parks, a lot of the education programs not provided by local government, universities that have done well in creating endowments — those kinds of scenarios are all in play," said Geiger.
On the other hand, Geiger said, if no budget deal is reached and sequestration happens, human services organizations in particular will be hurting.
"Some charities by nature of what they do are largely funded by government," Geiger said. "They're going to be hit harder because more people are going to need the social services and there will be less money to provide those services."
Geiger noted that nonprofits have already been experiencing that dynamic of increased need and decreased government support in the past several years.
"You kind of get into a pattern of, you say, 'Well, it won't get any worse,' and then it does," he said.
At the Lancaster County Community Foundation, vice president of finance and administration Lisa Hostler said she expects some contribution sources would be affected more than others, but the studies she has seen present a scenario that wouldn't be good news for any nonprofit.
"A lot of the studies are looking at anywhere from a 25- to 35-, 40-percent reduction in overall giving" if the deduction were changed, Hostler said. "The government can't impose any tax on a nonprofit that doesn't diminish the impact that the nonprofit has on the community. Everyone's concerned."
By "everyone," she means nonprofits. Outside them, she said, she sees nothing so much as confusion.
"All of the other types of deductions enrich individuals," Hostler said. "This is the one deduction that enriches the community. This is the one deduction that should never be on the table."
Bernie Bostwick, an executive vice president of Ambassador Advisors LLC, is more optimistic, expecting minimal changes in overall giving if the deduction is altered further.
"We work with a lot of nonprofits," Bostwick said. "People give sacrificially, because of the passion they have for the nonprofit, not necessarily because of the tax incentives that are back there."
He noted the IRA charitable rollover provision for 2012 and 2013 and also an upswing in giving by bequest as counterbalances to possible deduction changes.
"I think you're seeing a bigger focus on planned giving," Bostwick said, both because nonprofits are realizing the increasing need for a stable flow of funding and because people may be increasingly concerned about avoiding taxes on their estates.
"By giving to nonprofits, if it's done well, you could actually give more to your family," he said.
Nikki Shingle, a charitable services representative at Everence's Mt. Joy office, said she encourages organizations to mention bequests and charitable gift annuities as an alternative to cash gifts.
"I think that's one of the biggest concerns that donors have right now, that they'll have enough money to provide for themselves," Shingle said. "With the uncertainty in the health care environment and other parts of the economy, bequests and gift annuities provide some sort of a way to counteract that and still support the causes they believe in."
Giving: A quick look
Individual itemized donations claimed on tax returns, 2007 and 2010 respectively: $193.6 billion and $170.2 billion
Total U.S. charitable giving in 2011: $298.42 billion
Giving increase in 2011, adjusted for inflation: 0.9 percent
Giving by bequest increase in 2011, adjusted for inflation: 8.8 percent
Nonprofits surveyed that received no bequest funding in 2011: 49 percent
Donors with incomes Religious organizations
Donors with incomes >$100K more likely to support: Education, health care and arts institutions
November 2012 poll on reducing or eliminating the charitable tax deduction: 67 percent oppose the idea; 79 percent believe it would have a negative impact on charities and those they serve