Tax Considerations for Nonprofits, Fund Developers and Board Members

The Tax Cuts and Jobs Act (TCJA) has changed the charitable giving landscape and given donors reasons to reassess the structure of their philanthropic plans. With the passing of the law in late 2017 that doubled the standard deduction, many nonprofit organizations feared its impact on their revenues in 2018 and beyond.

My experience advising nonprofits tells me that boards and fund development departments are coming to grips with this new reality. Here are three examples I’ve seen organizations suggest to their donors to help them save on their taxes.

First, accountants like me often advise taxpayers on the cusp of itemizing deductions to “bunch” their deductions in two-year cycles. For example, taxpayers can prepay real estate taxes and state and local income taxes, as well as recurring or anticipated medical procedures, in year one for year two. They can also donate to charitable organizations in by contributing in late December the amounts they anticipate making in the following year to get them over the itemization threshold.

Second is to consider the Donor Advised Fund (DAF) which is a professionally managed fund acting as a charity to which a taxpayer “donates.” Donors may contribute assets other than cash such as publicly traded securities, certain restricted stock, mutual fund shares, cryptocurrency, real estate, privately held S and C Corp stock, and private equity and hedge fund interests. The original donor will then “advise” the DAF where and when they think a donation should be made. The funds that were originally donated can sit and grow in the DAF for as long as the donor wants to earn tax-free investment income that the donor can distribute to charities as well.

Third are Qualified Charitable Distributions (QCD) that allow individuals who are over 70 and ½ to contribute directly from their Individual Retirement Account (IRA) to a qualified charity up to $100,000 annually, thus satisfying their Required Minimum Distribution (RMD). Keep in mind that if the taxpayer contributes to a charity more than $100,000 it cannot be carried over to the following tax years. Note also that the QCD can also be taken from a SEP or Simple IRA that are not ongoing. The distribution must be directly transferred to the charity, so a taxpayer should not take a distribution from their IRA and then make the contribution. This allows the taxpayer to satisfy their RMD requirement while legally avoiding paying taxes on the RMD, but they do not get the charitable contribution.

The tax landscape for donations is getting more complex and charitable organizations must become more adept communicators and marketers, and educating their boards and planned giving staffs on these emerging tax methodologies that will in turn allow them to encourage donors to make sound philanthropic decisions.