Tax experts agree: adjusting to new accounting standards and the effects of the 2017 Tax Cuts and Jobs Act can make the nonprofit world more confusing – and challenging.
That’s why it’s essential for a CPA or other financial adviser to serve as your nonprofit’s partner and guide year-round to avoid surprises, especially at tax time.
Here are some tips to help ensure your nonprofit, one of more than 13,000 operating in Pennsylvania, maintains the strong financial backing it needs to continue its meaningful work while meeting today’s state and federal regulations.
We like to think that donors always give from the heart but, in reality, the benefit to the pocketbook is often a strong consideration.
While it may be the end of the year before we feel the full impact of the new tax law, we already are seeing signs related to the doubling of the standard deduction that left many households unable to write off charitable contributions.
The Association of Fundraising Professionals reports charitable donations of $1,000 or more increased by 2.6 percent in 2018, but the overall number of donors decreased 4.5 percent and contributions of less than $999 fell by about 4 percent.
What can you do? Consider reaching out to legacy donors – those donors who believe strongly in your mission and have supported the charity year after year. Ask for an in-person meeting to thank them and explain the new donor climate or perhaps invite them to a special event for donors only.
During the meeting, ask whether they would be comfortable including your organization in their estate plans. Through a specific charitable bequest, the donor can direct a gift, such as cash or property, to a charity.
Another possibility is for the donor to transfer the required disbursement from a tax-deferred retirement account to your nonprofit. IRS regulations require individuals to take a minimum distribution at age 70½. If your donor doesn’t need the income or wants to exclude the amount from taxable income, they can give up to $100,000 to your organization as a Qualified Charitable Distribution (QCD).
“Bunching” is an option for donors who are not financially able to make a sizeable donation year after year. Under the new law, taxpayers’ combined itemized expenses must exceed the standard deduction of $12,000 for an individual and $24,000 for a married couple. By “bunching,” a donor can give a more significant amount, then skip a year or two before donating to your charity again, meeting the higher requirement and maximizing his tax advantage for one year.
Pay attention to UBTI
Recent changes amended the definition of Unrelated Business Taxable Income (UBTI) with surprisingly little publicity, but potentially big impact. Your CPA should explain what these changes may mean for your specific organization, calculate whether additional tax may be due and, if necessary, complete form 990-T.
A few of the most notable changes are:
- Profits from one activity can no longer offset losses from a different unrelated business activity. (UBTI refers to activities not directly related to your organization’s mission).
- Employers that incur costs for commuter transportation, transit passes, parking and on-premise fitness facilities for their employees are no longer allowed to deduct these costs for tax purposes. They now fall under reportable UBTI and the employer will have to recognize income on these expenses. However, if a net loss carryforward is available from prior years, this loss can be used to offset the UBTI on the expenses listed above.
- Net operating losses can offset no more than 80 percent of taxable income.
More than taxes
In addition to helping your organization navigate through often bewildering changes in tax law and accounting standards, your CPA can serve as a valuable resource for your daily operations.
For example, a new standard requires disclosure of liquidity – reserve operating funds available for upcoming projects – in financial statements. Your CPA can offer advice on how to build up the reserve.
Additionally, your financial professional can serve as a resource for your daily operation. Look to your CPA to provide templates to help you formulate employee policies related to conflict of interest, record retention, whistleblowers, gift acceptance and other issues. This is in addition to addressing your needs for services including audits, taxes, employee benefits, litigation, fraud and information technology.
In the end, what will set your nonprofit apart? Preparation. Preparation to meet fundraising targets, tax requirements and, most of all, the needs of those who rely on your organization. A CPA or financial adviser can be a vital part of your nonprofit’s success.
Kyle R. Evans, CPA, is a supervisor with Boyer & Ritter LLC, where he provides audit, accounting and tax services for a variety of clients and industry groups, including business, nonprofit and personal income tax. Contact Kyle at 717-761-7210 or [email protected].