Why This U.S. Tax Change Is a Good Boost For Philanthropic Giving

When the U.S. Centers for Disease Control and Prevention (CDC) announced the first known travel-related case of the novel coronavirus on January 21, 2020, that event was an early indicator that the pandemic's impacts would span far beyond its origins. As people worry about health risks, plus the consequences of a potential loss of work, many are restricting their spending. That trend may hurt philanthropic giving, which is so important to nonprofit organizations that rely on donations and grants to function.

There already had been evidence suggesting that philanthropic giving is on the decline. Statistics cited by Giving USA found that individual giving declined 1.1 percent in 2018 — accounting for a 3.4 percent drop when adjusted for inflation.

That downturn is particularly worrisome now that many households simply don't have the extra money to contribute, with as many as 36.5 million Americans unemployed due to the COVID-19 outbreak. Of course, some of the world's wealthiest citizens — like Jeff Bezos and Bill Gates — have made sizable philanthropic contributions. But their largess has gone to massive projects like developing a vaccine for COVID-19 or fighting climate change, so many nonprofits will have find new sources of funding or drastically scale back their work.

Subsequently, the federal government has stepped in to propose a new bill that would create a change in the tax code to incentivize citizens to boost their philanthropic giving. This decision may give some charities some assistance in these uncertain times, but will it be enough?

How are nonprofits coping?

Among organizations and nonprofits, food banks are bearing the brunt of the slump. Individuals have stopped volunteering or donating food and other items to practice safe social distancing. This lack of supplies and delivery workers has in turn inflated operating costs.

Carlos Rodriguez, president of the Community Food Bank of New Jersey, reported that his organization saw an 800,000-pound drop in the amount of donated food given during both March and April. Also, Food Bank For New York City announced it would temporarily suspend volunteer help and has shifted to hiring paid temporary workers.  

Food banks that have managed to remain open rely on alternate ways to increase the incoming stream of supplies. Often, strategies involve connecting with funders before competing charities reach out. The struggles food banks now face are exacerbated by the reality that organizations that traditionally have donated huge quantities of food and other products have shut down.

Doing so, however, uses more of their hard-earned dollars. This funding method isn't sustainable in the long term, especially for organizations that had difficulties before the coronavirus posed additional challenges. The Nonprofit Finance Fund’s 2018 State of the Nonprofit Sector Survey found that 57 percent of respondents could not meet the existing demand from service users. The figure rose to 65 percent among organizations addressing needs in low-income communities. The COVID-19 pandemic imposes new threats to already burdened groups.

The CARES Act has a provision designed to increase philanthropic giving

To boost funding and help boost philanthropic giving, Congress created the Coronavirus Aid, Relief and Economic Security (CARES) Act, commonly known as the coronavirus relief package. This act revised the federal tax code to incentivize charitable giving, with an emphasis on food and monetary contributions. Moreover, this legislation established new deductions for cash donations, thereby benefiting taxpayers. 

For example, one of the main charity-related portions of this bill states taxpayers may take a one-time deduction of up to $300 for gifts of cash made to charitable organizations in 2020. They can use this without having to itemize their deductions. For taxpayers who do itemize, the Internal Revenue Service (IRS) raised the deduction limit for charitable donations made in cash.

People can now deduct up to 60 percent of their adjusted gross income — a 10 percent increase compared to what the IRS formerly permitted. This factor means that many people who give substantial donations may anticipate larger tax breaks in 2020.

Rewriting to tax code to help nonprofits

While incentives from the coronavirus relief package may boost the number of small donations to nonprofits, these contributions won't be enough to keep food banks and other organizations open. Rather, nonprofits need an immediate cash infusion to sustain their relief efforts.

Many citizens can't fulfill this need right now, even with incentives. Subsequently, nonprofits will have to look to community development financial institutions (CDFIs) for aid. Still, these CDFIs may not be able to support these nonprofits or community organizations in the long term.

Thus, the federal government will have to find a more comprehensive solution for the issues surrounding reductions in philanthropic giving. The coronavirus relief package did bring about a $600 increase in weekly unemployment insurance benefits for which nonprofits don't have to make payments. However, it did not minimize the amount organizations will otherwise be paying for the spike in unemployment.

More than 200 national nonprofits signed a community letter that their allies delivered to Congress on April 8, 2020. It urges congressional legislators to consider a Nonprofit Track comprised of several modifications to the CARES Act. These adjustments included:

• Designating exclusive funding for nonprofits within the two principal loan programs in the CARES Act.
• Increasing the amount of the new $300 deduction for people who choose not to itemize, plus extending the timeframe beyond 2020.
• Raising the federal unemployment insurance reimbursement percentage to 100 percent of costs for self-funded nonprofits.
• Enabling taxpayers who contribute between March 13 — the date when the U.S. declared a national emergency — and July 16 to claim itemized or above-the-line deductions for those gifts on their 2019 tax returns.

The bottom line: nonprofits must remain proactive

The proposals discussed above could indeed stimulate individuals’ desire to give, thereby helping nonprofits continue operating during these difficult times. However, it is not yet clear whether Congress will take those actions or others covered in the group correspondence. Thus, charities should continue other options as they look for financial assistance via support programs, grants, loan funds and 501(c)(3) bonds to increase their resiliency.

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