Tax Cut and Jobs Act Impact on Nonprofits
It’s been 15 months since the Tax Cut and Jobs Act (TCJA) became law. At the time of passage many pundits predicted dire consequences for the nonprofit sector, largely due to the near doubling of the standard deduction, meaning the high threshold for deducting charitable gifts (and other items such as state/local taxes and mortgage interest) would be difficult to achieve for many taxpayers. As a result, the concern was a significant decrease in charitable giving would occur.
While taxpayers are preparing their 2018 returns and realizing the first-year effect of the TCJA, it would be noteworthy to examine evidence—both anecdotal and broad-based—of the effects of this substantive change in the U.S. tax code. More definitive reports are soon to be released, namely the Fundraising Effectiveness Project Report (FEP) from the Association of Fundraising Professionals (AFP) and the Giving USA (GUSA) study from the Indiana University Lilly School of Philanthropy.
During the past 15 months, philanthropy consultants have been asked about the potential and likely impacts of the TCJA. The following is a compilation of the frequently asked questions (FAQ).
Let’s start with the elephant in the room! Did giving increase in 2018?
Preliminary examination of available data appears to indicate a slight (1-2 percent) increase in total giving. The growth appears to come from major donors (gifts over $1,000). The fourth quarter 2018 update from the FEP indicates a sharp drop in giving in the general donor (under $250) of 4.4 percent and in the mid-level donor ($251-999) of 4 percent. Major donor giving increased by 2.6 percent.
What evidence is out there about the impact on the TCJA on giving?
A quick search for examples of the TCJA impact shows a mixed bag of results. These examples are not part of any scientific study, but the results give some measure of comfort. For instance, Inside Philanthropy surveyed approximately 25 charities across the United States. Some of the Inside Philanthropy findings:
- United Way in Lewiston, Maine recorded $200,000 more gifts in 2018 to a total of $1.4 million.
- Arrowhead United Way in San Bernardino, California reported approximately the same level of giving ($1 million).
- United Way in Sioux Falls, South Dakota gifts increased by 2 percent in 2018.
- Jewish Federation of Greater Phoenix broke the $5 million mark in 2018 with a total of $5.2 million, up substantially from its 2017 gift revenue of $4.4 million.
- Santa Fe Community Foundation saw a 15 percent increase in 2018 gifts and raised $8 million.
- Delaware Community Foundation increased its giving by 20 percent in 2018 to $30 million (up from $24 million in 2017).
From the Minneapolis/Saint Paul area as reported by the Star Tribune on January 19, 2019:
- Many Minnesota nonprofits reported no significant changes in year-end gifts, but they also note caution is warranted as the long-term effects of TCJA remain unknown.
- Union Gospel Mission in Saint Paul saw a 1 percent decrease in its $6.5 million goal for 2018.
- Walker Art Center gifts held steady in 2018.
- Loaves and Fishes experienced a precipitous decline (31 percent) in December giving after an exceptional November (perhaps Giving Tuesday in November pulled forward gifts which would normally be made in December?), yet still finished 2018 with a slight increase.
This smattering of results in no way replaces the comprehensive nature of the FEP or Giving USA studies. Initial fears expressed by many nonprofit leaders of a 5-7 percent decline in overall giving may be overblown. The sector should have a far more complete picture in June with the release of the Giving USA report.
Looks like the nonprofit sector did OK in the first year. Are any other warning signs out there?
Unfortunately, nonprofits still have huge problems with 1) donor retention, 2) a shrinking donor base which causes a reliance on large philanthropic gifts, 3) turnover of nonprofit executives, and 4) increasing demand for services. Let’s focus on items (1) and (2) in this post.
Donor retention remains a huge problem for the nonprofit sector with the ability to retain first-year donors continuing to hover at an unsustainable level. According to the FEP’s data, first-time donor retention rate is 20.2 percent (no distinction between offline and online gifts).
The leaky bucket—so often used as an image for nonprofit’s inability to retain donors—continues to spring new leaks. The fourth quarter FEP report, which covers 2018, shows the overall retention rate at 44.5 percent, which leads to the next topic: the shrinking donor base.
While overall giving has risen to over $410 billion in 2018, fewer people are making charitable gifts. A University of Michigan study notes a steep decline in the percentage of U.S. households giving to nonprofit organizations—from a highpoint of 67.6 percent to 55.5 percent in the past 14 years. The reliance on receiving more dollars from a smaller pool of donors represents a clear warning to nonprofits—the sector must work harder and harder for the same, or higher, levels of gifts.
I run a small nonprofit. What are some takeaways for me?
You have limited time to devote to fund development activities. The following steps may provide you with a game plan to provide the best opportunities for success. A word of counsel as you consider your actions: consistency. However you choose to implement your plan, stay with it. Change only when data warrants altering your activities.
- Focus on donor engagement. Why do your donors give to your organization? What are their values and goals for their personal philanthropy? What difference do their gifts make in advancing your mission? Ask them. For your major donors, can you or a board member personally meet with each? Consider surveying your donors and report back the results. Let them know what they said and how your organization is changing based on their feedback. That simple act of letting donors know you have listened, and where feasible, have acted upon their responses is a powerful tool in your engagement ‘arsenal’.
- Master the art of storytelling. Put your donor at the center of the story—only the donor makes the programs work and the successes happen. How has the donor’s generosity impacted those served by your organization? Show how without those gifts, your community would not be as vibrant.
- Empower your board to tell your story. Many board members are reluctant to make the fundraising ask, but they can certainly ask donors why they chose your agency? What inspired their gift? Board members have enormous credibility in conversations with donors.
- Place a concerted emphasis on building a monthly giving program. Monthly gifts of $10, $20, or $50 can make powerful impacts on your services and smooth out monthly cash flow valleys. Demonstrate the value of monthly giving through giving circles, for instance.
- Make a mobile presence happen NOW! Just as online giving has become widely accepted in our sector, mobile giving is poised for a similar trajectory. The next phase of being a donor-centric organization is a robust mobile giving program. This is another arrow in your quiver, but one that has firmly taken root. According to Nonprofits Source, 25 percent of donors complete their donations on a mobile device. Giving is only one component to your mobile presence—54 percent of all nonprofit emails are read on a mobile device.
How has the TCJA boosted large gifts?
One need only look at the growth in the Donor Advised Fund (DAF) industry. The Chronicle of Philanthropy (Chronicle) 2017 top 10 recipients of charitable giving were six DAFs, including two of the top five. In 2018, The Chronicle excluded DAFs to focus on organizations in active service (i.e. human services, education, healthcare, etc.). Despite this change in methodology, five of the six largest recipients of charitable gifts were DAFs. Without getting into the possible ‘wealth warehousing’ effect and that philosophical discussion, DAFs exert considerable influence in the minds of large donors. (DAFs are highlighted in the following table.)
(Source: The Chronicle of Philanthropy: October 2017 and November 2018 issues, respectively.)
- Philanthropic giving and the performance of the U.S. economy, particularly the equity markets, are intensely correlated. As the economy goes, so does giving.
- In that line of thinking, in June of 2018, the National Association for Business Economics predicted economic growth of 2.7 percent in 2019 but also voiced concerns over a new recession in 2020. Two-thirds of these economists believe a recession will begin before the end of 2020.
- In October of 2018, the International Monetary Fund lowered its U.S. economic outlook to a growth rate of 2.5 percent due to the unsettled trade issues between the United States and China. A potential Mexican border shutdown could also adversely affect U.S. economic performance in 2019.
- The TCJA on estate giving is difficult to gauge currently. Estate giving traditionally is slow to respond to tax changes. The doubling of the exemption to $11 million for individuals and $22.4 million for couples results in fewer estates being subject to estate taxes. Donors who face estate tax liability may increase their giving during their lifetime, create testamentary gift vehicles, or a combination. A study published in the Boston College Law Review established a strong connection between a higher estate exemption and lower giving by bequest. Suffice to say, the TCJA impact on estate giving is debatable entering the 16th month from the law’s effective date.
- The reduction in U.S. corporate taxes from 35 percent to 21 percent facilitated many employers to provide one-time bonuses to its workers. While these bonuses were no doubt welcomed and appreciated by the recipients, corporations still must meet financial projections and expectations. The first duty of a corporation is to increase shareholder return on equity, not make charitable gifts. Questions remain: does a reduced tax burden mean more investment back into the business and reduced giving OR can business spend more money in their local communities as a result of increased profits from lower taxes? Special one-time philanthropic investments from corporations, such as U.S. Bank’s $150 million gift to its own foundation, are no doubt welcomed by nonprofits. Yet are gestures like this merely a tactic to boost public relations? It is difficult to see another nine-figure gift in the future.
- A final word to nonprofit executives. Concentrate your efforts on donor engagement and crafting the infrastructure to allow the broadest array of communications and means of making gifts possible. Focus on relationships, not transactions!
John Gilchrist, FAHP, CFRE is the Managing Principal of Philanthropy Focus LLC (dba Fundraiser Strategies), a boutique consulting firm dedicated to the success (fundraising and governance) of nonprofit organizations. He has worked with over 120 Network for Good clients since 2015.