With Charitable Giving Tactics Old and New, Nimble Nonprofits Win

By Laurie De Armond, CPA

The numbers are out.

Charitable giving grew by 2.1 percent in 2014, according to the newly-released 2014 Charitable Giving Report from Blackbaud, and this modest growth will no doubt prompt nonprofit fundraisers and executives to take a step back and evaluate their own fundraising results from the past year. But behind this solitary, lackluster statistic, there’s a more complex and profound transformation taking place in the U.S. charitable giving environment.

Above all, nonprofits currently face a challenging combination of longstanding norms and evolving trends. Nonprofit trade journals are full of articles about online giving trends, social media tactics and crowdfunding triumphs that provide resounding success stories and helpful tips around improving fundraising effectiveness. These newer fundraising models are critical, and will only become more important over time, but they are just one piece of the puzzle. Online donations accounted for only 6.7 percent of all U.S. giving in 2014, according to Blackbaud, and nonprofits are still largely working to secure donations via traditional channels, attract and retain new donors, and encourage affluent donors to extend their generosity through large gifts. To be sure, these perennial challenges are not going anywhere, but in the face of evolving donor behavior, nonprofits must evolve, as well.

Consider, for example, what’s occurring among the largest charities in the United States. According to The Chronicle’s Philanthropy 400 index, these top organizations saw an 11 percent boost in donations during 2013, driven largely by affluent donors. Despite this growth, donor preferences shifted notably, and the affluent donors that contributed the lion’s share of revenue to the 25 largest nonprofits increasingly gave to donor-advised funds (DAFs). In fact, four of the top 10 nonprofits by revenue were DAFs last year, and a growing number of these funds continue to move up the ranks. For traditional large charities (which saw 1.3 percent growth in donations during 2014), as DAFs receive a greater share of contributions from America’s philanthropists, the ongoing challenge of attracting and retaining donors is only further intensified.

This is just one of many major shifts in donor behavior, but its impact and ramifications are clear: Even the sector’s behemoths face competitive threats and the draining effects of donor abandonment. Charities of all sizes and across all segments rely on large bases of generous givers. But as new generations of donors gain financial means, and as the interests and giving preferences of existing donors transform, so must charities’ fundraising strategies.

What remains constant is the need for engagement. However, shifts in technology mean that connecting with donors requires new mediums of engagement that are accessible, relevant and appealing. For most organizations, antiquated tactics like telethons, telephone solicitation and direct mail campaigns no longer suffice. Effectively competing for funds now demands an adaptive and strategic approach—one that clearly and creatively communicates outcomes; one that creates an impassioned community of advocates; and one that, ultimately, transforms these advocates into a strong base of donors for sustained fundraising  growth.

Moving forward, savvy and successful organizations will be those that not only adapt strategically, but also tactically. Digital platforms—online donation portals, mobile-friendly sites, text and email campaigns, social media campaigns—offer the ability to constantly and creatively engage existing and potential donors, as well as build online communities of advocates and financial supporters. Just as importantly, they provide donors with ease and accessibility for actually making donations. With 8.9 percent growth in overall online donations during 2014, a strong online presence is now essential for nonprofits.

Still, staying relevant in today’s highly competitive environment requires constant tactical innovation. From fun and engaging social media campaigns like the ALS Ice Bucket Challenge, to the rise of community-building giving days like #GivingTuesday, organizations are starting to realize that aside from large gifts, big results can come from outside-the-box fundraising initiatives that encourage peer-to-peer giving. Expect to see more nonprofits pushing the creative bounds and achieving new levels of success in the year ahead.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2015). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com

Tax Development Highlights

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Developments concerning the Affordable Care Act (ACA). 

In the lead-up to the roll out of the health insurance exchanges on Oct. 1, 2013, the IRS issued the following guidance on the ACA:

Individuals:

  • The IRS released Questions and Answers (Q&As) on the health insurance premium tax credit on its website. This credit is designed to make health insurance affordable to individuals with modest incomes (i.e., between 100% and 400% of the federal poverty level, or FPL) who are not eligible for other qualifying coverage, such as Medicare, or “affordable” employer-sponsored health insurance plans that provide “minimum value.” To qualify for the credit, individuals must purchase insurance on a health exchange. The Q&As note that individuals can choose to have the credit paid in advance to their insurance company to lower what they pay for their monthly premiums, and then reconcile the amount paid in advance with the actual credit computed when they file their tax return. Alternately, individuals can claim all of the credit when they file their tax return for the year. The Q&As explain exactly who is eligible for the credit and address other important aspects of it.
  • The IRS issued final regulations on the “shared responsibility” payment under the ACA, which is the enforcement mechanism for the ACA’s mandate that most individuals maintain health insurance coverage. Starting in 2014, the individual shared responsibility provision calls for each individual to have basic health insurance coverage (known as minimum essential coverage), qualify for an exemption, or make a shared responsibility payment when filing a federal income tax return. Individuals will not have to make a payment if coverage is unaffordable, if they spend less than three consecutive months without coverage, or if they qualify for an exemption under one of several other reasons, including hardship and religious beliefs. The final regulations address these and other aspects of the shared responsibility payment.

Small Businesses:

  • The IRS issued proposed regulations on the tax credit available to certain small employers that offer health insurance coverage to their employees. This credit is available to an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. The proposed regulations would become effective when they are formally adopted as final regulations. However, employers may rely on the proposed regulations for tax years beginning after Dec. 31, 2013, and before Dec. 31, 2014.

Tax treatment of same-sex spouses. 

The IRS and other Federal agencies issued guidance on the treatment of same-sex spouses and couples for tax and other purposes in light of the Supreme Court’s landmark Windsor  decision striking down section 3 of the Defense of Marriage Act (DOMA), which had required same-sex spouses to be treated as unmarried for purposes of federal law. The key developments are as follows:

  • Effective as of Sept. 16, 2013, the IRS adopted a “state of celebration” rule in recognizing same-sex marriages. This means that same-sex couples who were legally married in jurisdictions that recognize their marriages (i.e., “state of celebration”) will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage. Spouse may retroactively apply this rule to open years.
  • Same-sex spouses who were legally married in a state that recognizes same-sex marriages must file their 2013 federal income tax return using either “married filing jointly” or “married filing separately” status, even if they now reside in a state that does not recognize same-sex marriage. Same-sex spouses who file an original 2012 tax return on or after Sept. 16, 2013 also generally must file using a married filing separately or joint filing status. Same-sex spouses may file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations on refunds.

The IRS provided optional special administrative procedures for employers to use to correct overpayments of employment taxes for 2013 and prior years for certain benefits provided and remuneration paid to same-sex spouses.

The Department of Labor’s (DOL)’s Employee Benefits Security Administration (EBSA) announced that it is following the IRS in recognizing “spouses” and “marriages” based on the validity of the marriage in the state of celebration, rather than based on the married couple’s state of domicile, for purposes of interpreting the meaning of “spouse” and “marriage” as these terms appear in the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and in Internal Revenue Code provisions that EBSA interprets.

  • In Frequently Asked Questions (FAQs) posted on the IRS’s website, the IRS made clear that same-sex and opposite-sex individuals who are in registered domestic partnerships, civil unions, or other similar formal relationships that aren’t marriages under state law aren’t considered as married or spouses for federal tax purposes.

New rules for deducting or capitalizing tangible property costs. 

The IRS issued new regulations for determining whether amounts paid to acquire, produce, or improve tangible property may be currently deducted as business expenses or must be capitalized. Among other things, they provide detailed definitions of “materials and supplies” and “rotable and temporary spare parts” and prescribe rules and elective de minimis and optional methods for handling their cost. They also have rules for differentiating between deductible repairs and capitalizable improvements, among many other items. The regulations generally are effective for tax years beginning on or after Jan. 1, 2014, but taxpayers can elect to apply them to certain pre-2014 years.

New rules for dispositions of certain depreciable property. 

The IRS issued proposed regulations that change several of the rules for dispositions of Modified Accelerated Cost Recovery System (MACRS) property. While the regulations are not final but merely proposed, taxpayers may rely on them. Included among the changes are rules that no longer treat structural components of a building as separate from the building and rules providing that partial dispositions generally are treated as dispositions.

New simplified relief for late elections pertaining to S corporations. 

The IRS provided simplified methods for taxpayers to request relief for late elections pertaining to S corporations. The relief covers the S corporation election itself, the electing small business trust (ESBT) election, the qualified Subchapter S trust (QSST) election, the qualified Subchapter S subsidiary (QSub) election, and late corporate classification elections which the taxpayer intended to take effect on the same date that the taxpayer intended that an S corporation election for the entity should take effect.

Simplified per-diem increase for post-Sept. 30, 2013 travel.

An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn’t exceed IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn’t subject to income- or payroll-tax withholding and isn’t reported on the employee’s Form W-2. In general, the IRS-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. Instead of using actual per-diems, employers may use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. The IRS released the “high-low” simplified per-diem rates for post-Sept. 30, 2013 travel. The high-cost area per-diem increases $9 to $251, and the low-cost area per-diem increases $7 to $170.

Supreme Court to decide FICA tax treatment of severance pay. 

The Supreme Court agreed to review a decision of the Court of Appeals for the Sixth Circuit which held that severance payments aren’t wages for purposes of Federal Insurance Contributions Act (FICA) tax. Thus, the Supreme Court will resolve a circuit split that currently exists between the Sixth and Federal Circuit Courts on the issue.

Please don’t hesitate to contact us at info@templetonco.com or 561-798-9988 to begin discussing options specific to your tax situation.

New 3.8% Medicare Tax on “Unearned” Net Investment Income

High-income taxpayers will be hit with two big tax hikes under the recently enacted health overhaul legislation: a tax increase on wages and a new levy on investments.

To help offset the cost of providing health insurance to millions of Americans, the new law imposes an additional 0.9% Medicare tax on wages above $200,000 for individuals and $250,000 for married couples filing jointly. In addition, for higher-income households, the new law adds a 3.8% tax on unearned income, including interest, dividends, capital gains and other investment income.

It is the 3.8% surtax on “Unearned Income” that we write about today.

3.8% Tax on Unearned Income

Starting in 2013, high-income taxpayers will be subject to a new tax based on net investment income—a 3.8% Medicare contribution tax.  The Health Care and Reconciliation Act of 2010, which amends the Patient Protections and Affordable Care Act, outlines the new Medicare tax.  Here’s an overview of what the new tax will mean to you, and some methods to review to lessen the impact of this tax.

What is the Net Investment Income Tax (NIIT)?

Section 1411 of the Internal Revenue Code imposes The Net Investment Income Tax (NIIT). The NIIT is a tax of 3.8% on certain net investment income of individuals, estates and trusts that have income above certain threshold amounts.

Who is subject to the Net Investment Income Tax?

This new tax will only affect taxpayers whose modified adjusted gross income (MAGI) exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. Estates and Trusts will be subject to the Net Investment Income Tax if they have undistributed Net Investment Income, and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (for tax year 2012, this threshold amount is $11,650).

(For individuals, your AGI is the bottom line on Page 1 of your Form 1040. It consists of your gross income minus certain adjustments to income. If you claimed the foreign earned income exclusion, you must add back the excluded income for purposes of the 3.8% tax.)

If your AGI is above the threshold that applies to you ($250,000, $200,000 or 125,000), the 3.8% tax will apply to the lesser of (1) your net investment income for the tax year or (2) the excess of your AGI for the tax year over your threshold amount. This tax will be in addition to the income tax that applies to that same income.

Example 1: Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.

Example 2: A married couple that has AGI of $270,000 for 2013, of which $100,000 is net investment income. They would pay a Medicare contribution tax on only the $20,000 amount by which their AGI exceeds their threshold amount of $250,000. That is because the $20,000 excess is less than their net investment income of $100,000. Thus, the couple’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

What is net investment income (NII)?

The net investment income that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn’t included in net investment income, nor is wage income.

Passive business income (within the meaning of IRC section 469) is subject to the Medicare contribution tax. Thus, rents from an active trade or business aren’t subject to the tax, but rents from a passive activity are subject to the tax (however, deductible expenses related to rental income will reduce the amount subject to this tax). Income from a business of trading financial instruments or commodities is also included in net investment income.

Income that is exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the 3.8% Medicare contribution tax. Thus, switching some of your taxable investments into tax-exempt bonds can reduce your exposure to the 3.8% tax. Of course, this should be done with regard to your income needs and investment considerations.

Home sales.

Let’s review how the 3.8% tax applies to home sales. If you sell your main home, you may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring your income tax. This excluded gain won’t be subject to the 3.8% Medicare contribution tax.

However, gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the income tax exclusion, will also be subject to the Medicare contribution tax.

For example, a married couple has AGI of $200,000 for 2013 and in addition sold their main home for a $540,000 gain. The couple qualified for the full $500,000 exclusion of gain on the sale, leaving only $40,000 of taxable gain. As a result, the couple won’t be subject to the 3.8% tax, because their total AGI ($200,000 + $40,000) will fall below the $250,000 threshold.

Using the aforementioned example, if the gain on the home sale was $680,000, of which $180,000 was taxable, the couple would be subject to the 3.8% tax on $130,000 of the gain. That is the amount by which their total AGI of $380,000 ($200,000 + $180,000) exceeds their $250,000 threshold.

Exceptions from Net Investment Income

Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the Medicare contribution tax. However, those distributions may push your AGI over the threshold that would cause other types of investment income to be subject to the tax.

This makes Roth IRAs more attractive for higher-income individuals, because qualified Roth IRA distributions are neither subject to the Medicare contribution tax nor included in AGI.

The tax also does not apply to the gain related to the sale of an interest in an S Corporation or partnership, to the extent that the gain on assets held by the entity is from an active trade or business.

What investment expenses are deductible in computing NII?

To determine NII, Gross Investment Income (items described above) is reduced by deductions that are properly allocable. Examples of allocable deductions would include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in Net Investment Income.

How the Net Investment Income Tax is Reported and Paid

For individuals, the tax will be reported on, and paid with, the Form 1040. For Estates and Trusts, the tax will be reported on, and paid with, the Form 1041.

The Medicare contribution tax must be included in the calculation of estimated tax that you owe. Thus, if you will be subject to the tax, you may have to make or increase your estimated tax payments to avoid a penalty.

Planning Strategies

Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. Strategies may include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) meet the “Material Participation” requirements for your S Corp and Partnership holdings, (6) become a “Real Estate Professional” for purposes of holding rental real property (7) oil and gas investments, (8) timing estate and trust distributions, (9) charitable remainder trusts, and (10) installment sales and maximizing above-the-line deductions.

We would be happy to explain how these and other strategies might minimize your exposure to the Internal Revenue Code Section 1411  surtax. 

Please don’t hesitate to contact us at info@templetonco.com or 561-798-9988 to begin discussing options specific to your tax situation.