Strategies for Staying Funded in the Tax Cuts and Jobs Act Era
The Tax Cuts and Jobs Act (TCJA) introduced major changes to the Internal Revenue Code, many specifically directed at exempt organizations.
Delivering particular punch are the TCJA’s provisions altering the way exempt organizations account for and report unrelated business income, compensation and fringe benefits, as well as a tax on net investment income for certain colleges and universities.
It’s the change to individual taxes that may have the most significant impact as it relates to funding — and it’s far from positive. The substantial increase in the standard deduction may translate into decreases in charitable contributions, possibly between $13 billion1 and $24 billion annually2. This staggering drop in financial resources threatens to curtail operations, activities, events, third-party funding and salaries; it could also result in the elimination of as many as 264,000 jobs3.
In addition to nearly doubling the standard deduction, the TCJA fully doubles the estate and gift tax exemptions, a momentous change estimated to cost nonprofits as much as another $4 billion in donations annually. With the higher exemption, fewer estates will be subject to taxation, and even those that are will be taxed at a lower rate, reducing the likelihood that wealthy taxpayers will donate as a strategy to reduce their tax burdens.
Other changes reduce or eliminate deductions, such as state and local taxes and home mortgage interest, resulting, for some taxpayers, in a limited ability and desire to donate. Paying more in taxes means having less “disposable” income, a category that often includes charitable giving.
The New World of Philanthropy
The internet makes giving easier than ever. Flash fundraisers and social media sharing events raise significant amounts of money in remarkably short time spans. Amazon Smile equips its massive global following to direct donations to the charity of their choice with each purchase. The internet has also fostered online fundraising through social media, angel investors and groups, such as GoFundMe and Fundly. New companies offer entire messaging and online fundraising platforms. CharityNavigator.org provides information and ratings on charities around the world, and visitors can donate through its website. The merger of Foundation Center and GuideStar created Candid.org, offering comprehensive data on nonprofits, foundations and grants.
At the same time, organizations that have traditionally relied on government funding can no longer count on that support as federal, state and local resources shrink. Innovations — such as donor-advised funds and online platforms — are appearing, competition is mounting, dollars are diminishing and new nonprofit entitles are being created.
The Good News
Despite these enormous challenges, what remains positive is the human spirit. People are still compassionate. They still want to change the world, right wrongs, feed the hungry, champion the oppressed, house those in need, hear stirring music, save helpless animals, preserve natural wonders, support talented artists, enable children to thrive and so much more.
Strategies for Future Growth
Though economic expansion has produced greater wealth, people are devoting more energy to research, cause selection and financial evaluation. As donors become more selective in giving, exempt organizations must become more selective in cultivation. Nonprofits should focus their resources on three key tactics: research, creativity and message.
Tactic 1: Research
It is harder to land a new benefactor than upsell an existing one, so organizations should continue to court their current donor base. Now, however, groups may need to reach beyond this base, doubling or even tripling their efforts to recruit people, businesses and corporations they haven’t reached out to before. Fortunately, the internet makes it easy and effective to identify, focus on and connect with potential new funding sources.
Also promising are those who are committed to impact investing. Younger generations, particularly those who create or inherit wealth, are attracted to causes for which they can make a measurable difference. Equally appealing are initiatives to expand sustainability. Searching for those likely to share these interests may add previously untapped prospects to expand a donor base.
Tactic 2: Creativity
Once the target market has been pinpointed, the next step is to develop enticing ways to grab attention, touch hearts and open wallets. Letter-writing campaigns, telethons and textathons hold promise for causes that already possess a strong and emotional base. Typically, these are special interest groups advocating for a personal cause, such as an individual within the community suffering a hardship.
For those without such a reliable base, greater creativity is in order. Although fundraising events — longtime staples for nonprofits — are still viable, they now require more strategic planning. Many groups are now fine-tuning their planning to ensure donors are simultaneously “feeling good” and “doing good.” Some add an educational component so the pleasure of attending a performance by a regional ballet company, for instance, is complemented by the satisfaction of knowing funds are directed to support school dance programs. The key is understanding the factors likely to move and motivate those the organization is targeting.
Tactic 3: Message
Once the ideal donor base and optimal methods for reaching it have been identified, it’s time to hone the message that will be delivered. Concise, accurate, impactful, relevant — these are the watchwords to keep in mind as the message is evaluated and refined.
For groups that have represented the same cause for many years, this may present a challenge. If donor fatigue has set in, a message may be reformulated to resonate with past contributors whose priorities have changed and with potential new contributors who have different priorities altogether.
Consider highlighting new ways the organization’s cause affects people, communities or the world. Expand the mission to reflect issues new donors take to heart. Differentiate the way the organization works to solve a problem. Paint a touching portrait of those the group serves, and demonstrate the impact made by the program. Organizations that can make a realistic case for being the best at what they do need search no further for a convincing message.
Checking the Last Box: Form 990
As people make more rigorous selection assessments for their charitable dollars, it’s critical that the organization appear fiscally responsible. Many prefer to see that their contributions are going to an organization with the financial stability to help ensure that the program being funded will receive the intended money, rather than diverting contributions to cover other expenses. Informed donors know to check an organization’s Form 990 for this information.
To this end, it’s worth consulting with professionals to ensure an accurate Form 990. Experienced specialists understand the importance of, and nuances entailed in, accounting for exempt organizations. They can help make certain that the organization is telling its “story” in the best way possible.
The TCJA certainly presents challenges to today’s exempt organizations. Savvy leaders recognize the opportunities available and seize them to promote financial health and future success.
Christopher D. Petermann
Christopher D. Petermann, CPA, is a partner with PKF O’Connor Davies, LLP, and serves as co-partner-in-charge of the private foundation practice. He is a member of the NJCPA Nonprofit Interest Group.
This article appeared in the November/December 2019 issue of New Jersey CPA magazine. Read the full issue.