Individuals and tax preparers need to be aware of a significant impact on charitable giving that likely will result from a provision in the Tax Cuts and Jobs Act (TCJA).
While the consequences of the law, passed in December 2017, might be unintended, they are no less real for taxpayers — especially for charities. Vikki Sprull, President and CEO of the philanthropic network Council on Foundations, projects the new law "will result in a decrease of $16–$24 billion in charitable giving every year."
Subtraction by Addition
The bad news for charities came about as a result of what was supposed to have been good news for taxpayers. Under TCJA, the standard deduction doubles to $12,000 for individuals and $24,000 for married couples.
But that increased standard deduction had a very large string attached: It effectively eliminates itemized deductions for the vast majority of American taxpayers, with some estimates as high as 95%. If you're in that group, you're free to continue with your charitable giving as before. You just can't claim it as a deduction anymore, because the standard deduction has already maxed you out.
With the deductible charitable-giving option for individual taxpayers virtually eliminated, charities and their benefactors are now scrambling to find new ways to raise funds. There are a couple of ways for small businesses to donate to causes they support (although complex regulations are involved). Here are two of the most common avenues:
- Commercial co-venture: Businesses may choose to donate some or all of the proceeds from a dedicated product line to a specific cause. If, for example, you ran a clothing store, you could donate the sales proceeds of a line of shirts to a charity or nonprofit group. But as CharityLawyer notes, laws regarding commercial co-ventures vary widely by state, and noncompliance can lead to criminal penalties in some cases. CharityLawyer offers a valuable checklist for small businesses that are considering commercial co-ventures, including vetting charities to be sure they're up to date with all regulatory requirements.
- Endorsement arrangement: In this case, a nonprofit or charity receives a licensing fee in exchange for promoting a vendor's product. This option is more likely among larger corporations than small businesses, and many charities avoid it because of conflict-of-interest issues.
The CPA Journal wisely advises those on both sides of the charitable giving equation to proceed with caution. Consult your attorney and a bookkeeping services professional before entering into any charitable arrangement involving your small business.