Many individuals and businesses open their wallets during the holidays to support local and national charities. Under current tax laws, itemizing allows them to deduct these donations from their taxes. The standard deductions are increasing, which means fewer people need to itemize, erasing the tax advantages of generosity. Let’s look at other changes to nonprofit tax laws.
Impacts of New Nonprofit Tax Laws
The new tax laws hurt nonprofits in the following areas:
-Increase in standard deduction will do away with tax incentives to donate to charities
-Unfavorable changes to tax-exempt status of interest income from bonds
-Changes to business income produced by nonprofit entities
Higher Standard Deductions are a Blow to Charitable Giving
Currently, many taxpayers itemize tax deductions, such as charitable donations. Under the new tax laws, effective Jan 1, 2018, standard deductions dramatically increase. Fewer people will itemize when the tax benefits of doing so disappear. As a result, charitable giving is expected to drop, negatively impacting nonprofit organizations that rely on donations to stay afloat. This is just one negative change in nonprofit tax laws.
Reduced Tax-Exempt Interest on Bonds
Nonprofits use advance repayment bonds to pay for construction and capital expenditures. Interest gained on these bonds is currently exempt from taxation. Donors accept lower returns in exchange for tax-exempt bond income. In return, this allows nonprofits to negotiate lower interest payments, reducing the cost of borrowing. Under the new rules, this interest becomes taxable.
Business Income Tax on Unrelated Business
Treatment of Unrelated business income tax, referred to as UBIT, changes under the new nonprofit tax laws. Under the new rules, charities cannot use losses from an unprofitable business to decrease tax liability on an unrelated profitable business. However, it can use losses from one year to reduce taxes on another year in the same business.
On the Brighter Side
On a happier note for charities, wealthier donors can deduct more charitable gifts. The current limit of 50 percent of adjusted gross income increases to 60 percent under the new laws. This will likely encourage higher donations from top earners that could offset losses due to the other changes.
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