The whole economy is reeling from COVID-19, but few industries have been as impacted by the novel coronavirus as the nonprofit sector. Social distancing restrictions have forced some charities to shut down their programs or operations. Others have experienced a major decrease in funding from both governmental and private sources as the nation navigates through challenging financial waters. In addition to all this, a recent Johns Hopkins University study found that ~1.6 million nonprofit jobs have been lost since March.
These obstacles all arrive at a time when the demand for help from vulnerable populations has skyrocketed. To continue aiding these groups, charities and private foundations should consider new strategies for generating or providing funding. These approaches may be unconventional and different than before, but they could produce results while not-for-profits petition the government for more relief.
Some recommendations include:
Encourage Tax Friendly Donations
In order to help support the nonprofit sector through this crisis, recent tax legislation has incentivized both individuals and businesses to give more during 2020. Most notably, individuals can elect to deduct donations up to 100% of their 2020 adjusted gross income (AGI). This is up from 60% previously and is the highest charitable deduction allowed in the United States’ tax history. The deduction is an incredible tax planning and leverage tool for individuals that have the means to take advantage of it.
For those taxpayers who don’t itemize, up to $300 per taxpayer in annual charitable contributions will be allowed as a reduction in taxable income. It is an “above the line” adjustment to income that will reduce a donor’s AGI, and thereby reduce taxable income. A donation to a donor advised fund (DAF) does not qualify for this new deduction.
In addition, required minimum distributions (RMD) that would have had to start in 2020 do not have to start until 2021 now, including distributions from defined benefit pension plans and 457 plans. This change may dampen the incentive for a donor to make a qualified charitable distribution (QCD) from their IRA in 2020. Even so, making a QCD this year will still allow itemizers and non-itemizers alike to direct up to $100,000 from their IRA to charities in a tax efficient manner. This means they won’t have to pay tax on those funds in the future when RMDs start back up again.
Update Your Fundraising Efforts
All these changes drastically affect the giving landscape, and nonprofits should update their fundraising efforts accordingly. For example, given the $300 deduction from taxable income available to most taxpayers, the target audience for fundraising solicitations may be reconsidered to include different financial demographics than in the past.
It may also require advanced planning on the part of wealthier donors, so nonprofits should encourage their large givers to work with tax advisors on appropriate projections for 2020. This includes the concept of whether to give cash or appreciated securities as the optimal solution – the best answer may not be the same as in prior years.
Lastly, donor acknowledgement letters should be revised to make it clear that any charitable gifts were not made to a supporting organization or donor advised fund, so the individual can take full advantage of the new deduction limits.
Communicate with Corporations
U.S. corporations may now deduct up to 25% of taxable income as charitable deductions for 2020, up from the previous limit of 10%. Please note that the new deduction limits are only for gifts that go to public charities.
This is a large increase, and it could greatly decrease some corporations’ bottom line taxable income. Given that incentive, nonprofits may want to target businesses for corporate giving opportunities or even consider creating a more permanent fund for a corporation that is charitably inclined and financially able to provide support.
Private Foundation Strategies
Additionally, the tax change also includes private foundations who may have unrelated business income and who file a Form 990-T. The charitable deduction will increase from 10% to 25% on this corporate filing, so private foundations may consider doing their own gifting/granting to increase their deduction in 2020 and reduce their overall taxable UBI. (Please note this will depend on if they are a nonprofit corporation or a charitable trust).
As another aid option, private foundations can quickly make grants available to individuals and organizations through an emergency assistance giving program (disaster relief, medical emergency, or financial hardship), without prior approval needed from the IRS. Private foundations can also ease the burden on grantees by accelerating distributions of prior grant commitments, removing certain restrictions to receiving that funding, and easing reporting requirements.
Private foundations should also investigate their qualifications for the conduit foundation rules. These rules would generally allow the foundation to convert excess distributions from prior years into current year deductions for the donor or founder of the organization. There will be a follow up article on the details and intricacies of this approach, but it is something to discuss with the private foundation’s tax advisor.
Navigating the COVID-19 Crisis
We would be remiss if we didn’t recognize the elephant in the room at a time like this. Nonprofits have been struggling for several months, but asking for donations when the country is in massive economic turmoil can feel wrong and off the mark. Add to that the fact that most nonprofits have furloughed or laid off a majority of their staff, so the fundraising departments may not be as robust as they were in the past. There is no clear-cut solution or message to address this problem, but the fact remains that without ongoing fundraising solicitations and efforts, some nonprofits will be unable to continue existing and aiding the very populations that need them most right now.
In the coming weeks and months, successful requests for charitable donations will need to be embedded in a larger expression of mutual support, empathy, and solidarity. And this approach should not be temporary. As the country deals with ever-greater personal loss and stress, charitable organizations cannot afford to do business as usual. The line between supporters and the supported will grow ever hazier. All of us will need help, and all of us will need to do our best to provide help to others. The charitable incentives and opportunities outlined here will give your organization a place to start in that process.
If you have any questions on the topics above, or require strategic tax planning for your organization, contact a Clark Nuber advisor.
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