Nonprofits Do More with Less but Fear Tax Revamp Will Hit Charitable Intake

Colleen O'Dea | March 7, 2019 | Social
Amid growing demand for their services, the worry is that federal income-tax overhaul could lead some people to donate less to key service organizations

Some New Jersey nonprofit organizations are apprehensive that a change in federal tax laws means they could receive less money from individual charitable contributions.

An annual survey by the Center for Non-Profits found a climate of uncertainty and worry about funding among organizations that provide individuals with a host of services. Two-thirds of groups reported greater demand for services last year and three-quarter expect demand to grow this year. At the same time, though, only 38 percent reported getting more funding in 2018 than in 2017 and fewer than a third indicated that their revenues exceeded expenses in their most recently completed fiscal year.

Although the survey found that New Jersey’s nonprofits did more with less last year — and many are optimistic about 2019 — some may have trouble raising money if individuals filing their first returns since the revamping of federal tax laws learn it no longer pays to deduct charitable contributions.
“This year’s mixed survey results clearly reflect today’s turbulent public policy, social and economic landscape,” states the report, released late last month. “Prolonged uncertainty and uneven circumstances continue to confront New Jersey non-profits, and once again concerns about resources, infrastructure and capacity dominated the survey findings. One year after the passage of the federal tax overhaul, its full implications on New Jersey charities remain unclear, and this is unquestionably on the minds of many respondents as well.”

The health of the state’s charitable organizations is important because of the large role they play in the economy and in providing assistance. New Jersey’s diverse nonprofit community of more than 34,000 organizations includes food pantries, afterschool programs, museums, environmental watchdogs, faith-based groups and others. Nonprofits in the state employ 324,000 people, almost 10 percent of the state’s workforce. The groups spend $42 billion annually and their 1.6 million volunteers provide services valued at $5.3 billion each year.

Most expect expenses to rise this year but not funding

“Non-profits matter,” said Linda Czipo, president and CEO of the Center for Non-Profits. “We all know the important programs and services that non-profits make available every day … What not everybody necessarily is aware of is that non-profits matter not only because of the programs they provide but because of the economic benefit, the economic impact they have on the state.”

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More than two-thirds of organizations expect their total expenses to rise this year, but fewer than half are anticipating an increase in funding. They are most uncertain about government funding for programs and are more optimistic about individual donations.

Czipo, however, said there is concern that some people could decide to cut back on their charitable contributions after filing their federal income tax returns. What filers are going to find will differ depending on a household’s specific circumstance, but many in the nonprofit world have been fearing the worst.

“The answer to the question, ‘What has tax reform meant?’ is we don’t really know yet,” Czipo said. “The data from 2018 are not really in yet.”

A recent report by the Association of Fundraising Professionals found that charitable giving nationally rose slightly — by less than 2 percent — in 2018, but only because donors who gave $1,000 or more increased their donations. The number of donors fell and gifts of amounts less than $1,000 also declined, by more than 4 percent.

Taxpayers taking fewer itemized deductions?

“The tax law signed in late 2017, which doubled the standard deduction and likely caused many taxpayers to take fewer itemized deductions including the charitable deduction, may have played some role in the results,” according to AFP’s analysis of the data. It added that the “full impact of the tax bill may not be felt until the end of 2019.”

Further complicating the calculations in New Jersey is the cap on the deduction for state and local taxes (SALT), which is impacting filers in higher-tax states like New Jersey more than in other places. The law capped the SALT deduction at $10,000. It’s common for homeowners in the state to pay that much in property taxes alone, so more New Jerseyans could wind up taking the standard deduction, which increased to $24,000 for a married couple, instead of itemizing. People unable to itemize and deduct the amounts they give to charity might decide to cut back on donations.

“There is a big potential impact in terms of the charitable giving deduction and New Jersey households,” Czipo said.

Some 35 percent of all New Jersey tax filers claimed a charitable deduction in 2016, the most recent year data is available, Czipo said. Nearly half of those who claimed a deduction had income under $100,000 and donated more than $1.5 billion to charities. “With the doubling of the standard deduction there are a lot of these households that will no longer be able to or it won’t be worth their while to itemize on their tax returns … That is the concern about what happens to their charitable gifts and what happens to the incentive to give and will they still be as able to be as generous as they were before.”

That could cause further problems for nonprofits that seem to always be scrambling to take in enough money to cover expenses under normal circumstances.

Rising demand, lagging resources

“The key finding and concern remains the clear and persistent gap between rising demand for non-profits’ programs and lagging resources,” according to the report. “This prolonged gap affects organizations of all sizes and purposes, and threatens the ability of non-profits overall to provide vital programs and services that our communities need.”

Czipo said the demand for services has been rising every year, not just in New Jersey, but nationally as well, and across virtually all types of organizations. Similarly, most nonprofits continue to say that they do not get enough money to keep pace with that demand. Two-thirds spent more money than they brought in last year.

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“Looking ahead, the outlook does not look much better,” Czipo said, noting that more nonprofits expect expenses to rise than anticipate increased revenues.

“Given the importance of non-profits to the social and economic well-being of our state and country, this gap deserves the urgent attention of all stakeholders, including public policy leaders,” the report states.

In addition to the impact of the changes in tax law, nonprofits have a number of other concerns for the coming year. These include meeting increased administrative costs associated with government grants and contracts and the projected higher costs of several changes in employment law — including a higher minimum wage.

What to do about the money question

To respond to funding uncertainties, groups have been exploring more partnerships or collaborations with other organizations to save money. They are also trying new fundraising appeals and looking for funds from alternative sources. Others are holding new special events and trying to recruit more volunteers.

According to Czipo, the center is also supporting two bills that could help with the tax changes. On the federal level, U.S. Rep. Chris Smith (R-NJ) is sponsoring HR-651, which would allow filers to deduct charitable donations directly from gross income tax, rather than having to itemize it. On the state level, a bipartisan bill (S-2179) would allow New Jerseyans to deduct from their gross income contributions to charitable organizations in the state, regardless of whether they took that deduction on their federal tax forms.

Czipo also suggested that nonprofits get more involved in advocacy, promoting their work and educating donors and the public about what it really means to run such organizations.

“There is so much going on, so many things swirling around all at once that it seems overwhelming,” she said. Czipo urges nonprofits to “invest in advocacy, both on the public policy end and just on talking up the cause.”