As the expiration of key provisions under the Tax Cuts and Jobs Act (TCJA) looms, the nonprofit sector finds itself grappling with significant uncertainties. These organizations, which serve as pillars of social support and community enrichment, must confront the dual challenges of shifting tax policies and a changing economic landscape. We’ll explore how nonprofits can navigate these challenges while advocating for reforms that ensure their sustainability.
The TCJA and Its Impending Expiration
Enacted in 2017, the TCJA aimed to simplify the tax code, spur economic growth, and provide relief to businesses and individuals. However, many of its provisions were temporary, set to expire at the end of 2025. Among these are changes to individual marginal tax rates, standard deductions, and itemized deductions, all of which directly impact charitable giving.
For nonprofits, the TCJA represented a double-edged sword. The near-doubling of the standard deduction simplified tax filing for many Americans but simultaneously reduced the number of taxpayers itemizing deductions. Since charitable contributions are deductible only for those who itemize, this shift resulted in fewer incentives for middle- and lower-income households to donate .
As Congress deliberates on whether to extend or modify the TCJA provisions, nonprofits face the prospect of pre-TCJA tax structures returning. Such changes could exacerbate the decline in charitable giving already observed in recent years .
Trends in Charitable Giving: A Decline in Donors
Charitable giving has been on a downward trend, with inflation-adjusted donations falling in recent years despite economic recovery. Data from Giving USA shows that inflation-adjusted charitable giving declined by 2.1% in 2023, marking the second consecutive year of negative growth. This decline is attributed to fewer households itemizing deductions, rising inflation, and broader economic pressures .
High-income individuals, who are more likely to itemize, continue to account for a disproportionate share of charitable donations. However, the erosion of lower- and middle-income donors is concerning. These groups historically formed the backbone of small, recurring donations that sustain many nonprofit organizations .
To counter these trends, the nonprofit sector is rallying behind initiatives like the Charitable Act, which seeks to restore a deduction for non-itemizers. This bipartisan proposal would allow taxpayers to deduct up to one-third of the standard deduction for charitable gifts. Proponents argue that such measures could incentivize giving among a broader demographic and reverse the decline in donor participation .
Nonprofits’ Financial and Operational Challenges
The potential expiration of TCJA provisions adds to an already challenging environment for nonprofits. Inflationary pressures and rising costs have strained operational budgets, forcing organizations to do more with less. At the same time, changes in tax policies could tighten the criteria for maintaining tax-exempt status, imposing additional compliance burdens .
Another pressing issue is the unrelated business income tax (UBIT), which requires nonprofits to separately calculate taxable income for each unrelated business activity. Adjustments to UBIT regulations could introduce new liabilities for nonprofits engaged in revenue-generating activities outside their primary missions. Such changes may necessitate restructuring to protect their tax-exempt status .
Corporate giving patterns, influenced by shifts in tax rates and economic conditions, also play a critical role. While lower corporate tax rates may boost profitability and potentially increase charitable contributions, the loss of tax incentives could lead to reduced giving by corporate foundations. This dynamic underscores the need for nonprofits to adapt to an evolving funding landscape .
Advocacy for Policy Reform: A Collective Voice
Recognizing the high stakes, the nonprofit sector is actively advocating for reforms to support charitable giving and organizational sustainability. Coalitions like the Charitable Giving Coalition have been instrumental in pushing for legislation such as the Charitable Act. By restoring deductions for non-itemizers, this act aims to democratize the tax benefits of giving, making them accessible to middle- and lower-income Americans .
Advocacy efforts have also focused on preserving tax credits provided under the Inflation Reduction Act (IRA), which supports energy-saving initiatives for nonprofits. The potential elimination of these credits could undermine cost-saving measures that are critical for many organizations .
Effective advocacy requires collaboration among nonprofits, policymakers, and sector associations. By engaging in policy discussions and raising awareness about the importance of favorable tax policies, nonprofits can influence legislative outcomes that align with their missions and values .
Strategic Adaptations for a Resilient Future
In light of these challenges, nonprofits must adopt proactive strategies to ensure their resilience. Key actions include:
1. Diversifying Funding Sources
Relying solely on individual donations exposes nonprofits to vulnerabilities arising from tax policy changes. Diversifying revenue streams—such as securing grants, forming partnerships, and developing earned income activities—can provide a more stable financial foundation. However, organizations must carefully navigate the implications of unrelated revenue on their tax-exempt status .
2. Strengthening Donor Engagement
Deepening relationships with existing donors is essential for sustaining charitable giving in the face of diminishing tax incentives. Nonprofits can emphasize the impact of their work, fostering a sense of connection and commitment that transcends financial considerations. Transparent communication about how contributions are used can further build trust and loyalty among donors .
3. Enhancing Financial Management
Robust financial management practices are crucial for navigating an uncertain tax landscape. Nonprofits should invest in professional expertise to optimize tax strategies, manage liabilities, and prepare for potential regulatory changes. Scenario planning and risk assessments can help organizations anticipate and adapt to future challenges .
4. Embracing Advocacy as a Strategic Priority
Advocacy is not just a reactive measure but a proactive strategy for shaping the policy environment. By joining forces with sector associations and engaging policymakers, nonprofits can amplify their voice and secure favorable outcomes. Highlighting the societal impact of their work can strengthen their case for supportive tax policies .
A Path Forward: Collaboration and Adaptation
The intersection of tax policy and nonprofit sustainability highlights the importance of collaboration and adaptability. As Congress deliberates the future of the TCJA and other tax reforms, nonprofits must remain vigilant, leveraging their collective voice to advocate for equitable policies.
Simultaneously, organizations should focus on internal resilience, exploring innovative funding strategies, and deepening donor relationships. By aligning their efforts with broader advocacy campaigns, nonprofits can navigate these uncertain times while continuing to fulfill their vital missions.
In a rapidly evolving tax landscape, the nonprofit sector’s ability to adapt and advocate will determine its capacity to thrive. With thoughtful strategies and unified action, these organizations can ensure their enduring impact on communities and causes worldwide.