The not-for-profit industry is experiencing significant upheaval, thanks to the Tax Cuts and Jobs Act (TCJA) and rapidly growing cyber risks. It’s important to recognize the trends that affect — or could soon affect — your organization if you’re going to respond in a manner that protects its funding, sustainability and mission.

Funding Gaps

Concerns about the impact of the TCJA on charitable giving appear to have been well founded. Contributions in nominal dollars declined in 2018 for the first year since the Great Recession, according to a report from Giving USA, a research and advocacy group for the nonprofit industry. In addition, fewer households with moderate income are giving to charities, according to a recent study by the Association of Fundraising Professionals (AFP). This could be especially problematic for smaller community-based organizations.
While the AFP study found a 1.6% increase in the amount of individual giving from 2017 to 2018, the growth was driven entirely by donations of more than $1,000. Smaller gifts and donor retention both dropped. The number of individuals who gave in 2018 slid by 4.5%, and the acquisition of new donors fell by 7.3%.

The TCJA probably isn’t the sole cause of these worrisome figures. However, stagnant or declining donations can blow big holes in an organization’s budget. Many nonprofits will need to overhaul their approaches to generating revenue to avoid budget deficits.

Expansion of DAFs

More nonprofits are exploring the concept of donor-advised funds (DAFs) as they struggle to realign their funding strategies. With a DAF, a donor can direct the DAF administrator to distribute funds annually in equal increments so a nonprofit receives a steady stream of contributions regardless of whether the donor itemizes tax deductions every year.

DAFs are also gaining in popularity with donors. Nearly half (46%) of new established DAFs were in response to tax reform, according to a recent Fidelity Investments survey of financial advisors. Moreover, DAFs aren’t just for the super wealthy. Upper middle-class families, particularly those looking to make up for lost tax deductions, are turning to DAFs.

Some nonprofits have avoided DAFs, but they’re here to stay. Just as an organization can’t afford to ignore innovations, like online or mobile donations, organizations could lose out if they don’t learn to love DAFs.

Cyber Risks

Nonprofits sometimes have a false sense of security when it comes to cybercrime — why would a hacker bother with a philanthropic organization, after all? Cybercriminals know that nonprofits generally have less sophisticated protections and resources than for-profit companies. Unfortunately, this makes client records, student records, employee data, donor information and credit card data particularly vulnerable.

Your organization’s servers aren’t the only potential targets of cyberattacks. If you outsource services, such as payroll and donation processing, to third parties, they must follow data security best practices. Your data also could be exposed if an employee loses a laptop, smartphone or thumb drive holding sensitive information. A cyber risk assessment can help you identify weaknesses and develop an appropriate cybersecurity plan.

Excise Tax on Executive Compensation

The TCJA could also affect decisions related to executive compensation, severance payments and settlements for some nonprofits. In addition to compensation decisions, many organizations need to develop new or more comprehensive tracking systems and controls for executive compensation.

What’s changed? Under the TCJA, there is a new excise tax on certain executive compensation. It equals the amount of the corporate tax rate (currently 21%) on 1) compensation in excess of $1 million paid to a covered employee, and 2) “excess parachute payments” made to a covered employee when he or she leaves the organization.

It’s important to discuss whether your organization could inadvertently be hit with the tax — and whether your compensation system is tracking the right information.

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Our not-for-profit specialists can help your organization deal with these and other challenges that stand in the way of achieving and sustaining your long-term mission.

The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Need help with your tax planning? Contact any member of our Tax Services Team.