"Nothing is certain but death and taxes" - Ben Franklin
Whether you’re a 501c3, for-profit, or somewhere in-between we believe you can make a difference in the world. So when we heard of friends in the nonprofit world fearing for their organizations because of the new tax plan our ears perked up. Then we started digging, and what we found might be described as cautious optimism.
The Lilly Family School of Philanthropy at Indiana University estimates the new tax plan will result in charitable donations to nonprofits shrinking by 13 billion or more each year. This number is being echoed across numerous media outlets, and lives at the core of current nonprofit anxiety.
How is this going to happen?
The new tax plan doubles standard deductions for individuals and couples from 6K to 12K and 12K to 24K respectively. This means the majority Americans have a greater incentive to select the standard deduction in lieu of an itemized deduction where charitable contributions are stated. Americans were previously incentivized to give more to charities so that their itemized deductions would be greater than the 6K and 12K standards. Additional commentary out of the Lilly Family School of Philanthropy argues Americans won’t completely stop giving, but they will give less.
(For our younger or confused readers: a standard deduction is the amount the government allows you to deduct from your full taxable income. That standard deduction is essentially not subject to income tax like the rest of your income. The standard deduction is the preferred method of deducing taxable income because of the complexity associated with line item deductions. It is a catch all for deductions like costs associated with work, donations, etc..)
Recent Historical Context
From 2012 to 2016, individual contributions to charities have gone from $228.93 billion to $281.86 billion. That’s slightly more than a 23% increase in just four years. By contrast, total GDP in the United States has seen 15% growth over the same time period. Individual donations have outpaced economic growth by a whopping 8% over four years.
Total contributions have continued to reach record highs, with 390.05 billion dollars of contributions in 2016 when the most recent data is available. It isn’t difficult to understand non-profit anxiety when levels of growth like this have been the norm for almost five years.
Worst Case Scenario
The average American could potentially decide to donate less money because of the tax plan, and it could be a direct result of the increased standard deduction. The Council of Nonprofits states the estimated loss in donations amounts to 250,000 jobs being lost in the nonprofit sector. That’s assuming every dollar lost is spent on a salary, but the statistic is meant to contradict the idea that the tax plan would lead to more jobs. A potentially worse impact of this loss in donations is a loss of food, medical, or other support services delivered to those in need.
Best Case Scenario
In addition to raising the standard deduction, the tax plan also raises the cap on charitable deductions. Theoretically the 10% increase in max deductible donations means the wealthiest in America would at the very least make up the difference lost as a result of the standard deduction increase. Ideally the estimated losses are overstated, and wealthy donations increase which would most certainly allow the nonprofit sector to continue their period of record growth.
As this tax season ends, FM-31 will be keeping a close eye on the data captured by the government and NGOs. Corporate charitable donations were the smallest portion of all contributions from 2012-2016. We were disappointed to hear this for a number of reasons. As social entrepreneurs we believe businesses can and do make a massive impact, but sadly data on the collective social impact made by organizations like TOM’s, Warby Parker, CauseGear, and others does not exist. We plan to publish a report of the 2017 social impact made by for profit organizations like these over the 2018 summer so we may have one more potential bright spot in the fight for good.