Federal Tax Policies: Important Information for Nonprofits

Nonprofit organizations play a critical role in providing services to communities while advocating for important causes. And while the ultimate goal of a nonprofit may be to carry out its mission, these organizations still need to be conscious of their finances and budgets.

This is perhaps especially true as it relates to taxes, as nonprofits are often tax-exempt and must follow specific rules and provisions to retain that status.

So, what do nonprofit directors and their financial teams need to keep in mind when it comes to federal tax policies and potential changes? Let’s dive in.

Tax Policies and Provisions Affecting Nonprofits

Currently, there are numerous tax policies and provisions in place that may have an impact on nonprofits and their tax planning. Most recently, the Tax Cuts and Jobs Act (TCJA) of 2017 has played a critical role in overhauling and simplifying taxes not just for corporations, but for nonprofits as well.

The TCJA contains several provisions that may directly relate to nonprofits, such as:

• • An increase in the standard deduction (which has impacted charitable giving).
  • A change in corporate income tax rates that also applies to tax-exempt organizations.
  • An excise tax on executive compensation over $1 million.

These are just a few examples of the many tax provisions that need to be taken into consideration when nonprofit organizations are preparing their annual tax returns.

What Will Happen in the Future?

In addition to provisions from the TCJA, there has also been some talk about enacting new tax rules and provisions that could impact nonprofit organizations in the future.

For example, one concern is that as more tax policies favor the standard deduction over itemized deductions, this could have a negative impact on taxpayers’ charitable giving to nonprofits because it would give taxpayers less of a tax incentive to make these contributions.

There has also been some speculation that future tax policies may include certain restrictions and additional rules that would make it more difficult for nonprofit organizations to claim tax-exempt status. Even for organizations that remain exempt, the amount of time and resources needed to prove and maintain that status could be detrimental to nonprofits’ missions.

In recent years, tax policies have led to lower corporate tax rates overall. If this trend continues, the lower tax rates could mean higher profits for corporations, which could make more funds available for charitable giving. On the other hand, if corporate tax breaks are eliminated, this could have the opposite effect of causing corporations to reduce their charitable giving to nonprofits.

Finally, there has been some concern over proposed changes to the Inflation Reduction Act of 2022. Specifically, some proposed tax provisions would eliminate green energy tax credits, which could put nonprofits in the green energy sphere at risk.

How Nonprofits Can Prepare

While only time will tell exactly which changes will be enacted for future tax years, nonprofits should stay on top of all proposals in order to remain prepared. After all, changes to tax policies and provisions can have a significant impact on charitable giving, tax-exempt status and other important aspects of running a successful nonprofit organization.

Now is a good time, for example, to start brainstorming strategies for these “what-if” scenarios. This way, if proposed tax changes are enacted, nonprofits will be prepared to act swiftly and in their best interest.

For example, some nonprofits may want to consider diversifying their funding sources as a means of protecting against a loss of donors. This could be done through exploring grants, partnerships and other revenue streams to keep nonprofits resilient.

Likewise, nonprofits should take time to invest in financial planning and advising services to keep them as informed and up-to-date as possible. Things can change quickly in the tax world, so being able to rely on a professional to relay potential changes can help nonprofits stay prepared.

The Importance of Proper Planning

With proper planning, nonprofit organizations can survive even the most drastic of tax proposals and provisions. The key, of course, is having access to an experienced and knowledgeable financial advisor who specializes in nonprofit taxes. With the right planning and strategizing, nonprofits can be prepared for whatever changes may occur while keeping the focus on furthering their cause and mission.

For nonprofits concerned about potential tax changes or just wanting to be proactive, now would be a great time to schedule a consultation with a financial advisor.

If you have any questions or would like additional information, please contact us.