Takeaways for Nonprofits: TCJA Impact

Just over two months ago, on December 22, President Trump signed the Tax Cuts and Jobs Act (TCJA), and ushered significant changes in the US Tax Code, effective January 1, 2018. Since the signing, the internet has been filled with wailing and gnashing of teeth as experts either bemoan the all but certain devastating effects on US charities or tout the wealth creation effects caused by TCJA.  As with most legislation, the effects will be somewhere in between, not entirely certain, and take longer to really understand.  By now, most know the highlights:

• Increase in the standard deduction to $12,000 for individuals and $24,000 for joint filers
• Elimination of personal exemptions
• Limitation on State and Local Taxes (SALT) of $10,000 (inclusive of income and property taxes)
• Reduction in corporate income tax rate
• Reduction of five of the seven tax brackets (marginal rates)

What do these changes mean for the nonprofit community and our donors?  The answer is not crystal clear; the short answer is ‘it depends’.   Key points to keep in mind (all examples are for discussion, NOT as professional advice):

• STANDARD DEDUCTION. The standard deduction has increased to $12,000 for individuals and $24,000 for joint filers, so many taxpayers who itemized in 2017 may or may not itemize in 2018 and beyond.  Some taxpayers will realize an increase in disposable income, a portion of which could then, in theory, be given to their favorite charity/charities.  The impact of this increase is partially offset by the elimination of the personal exemptions.
• INCREASE IN THE AGI DEDUCTION. The charitable deduction has increased from 50% of Adjusted Gross Income (AGI) to 60% of AGI. Donors can now claim larger deductions for their gifts of cash in the year the gift is made.
• LIMITATION ON STATE AND LOCAL TAXES (SALT). Beginning in 2018, taxpayers will be given the option to deduct their combined state and local property and income taxes, but only up to a cap of $10,000. (Take note, the $10,000 limit applies on the combined total of property and income taxes, not $10,000 each!)  The reduction in the SALT deductibility may benefit charitably-minded taxpayers in high tax states, such as California, New Jersey, and New York.  Assuming a taxpayer has reached the $10,000 limit through state income and property taxes, gifts of appreciated stock or property may be more valuable than an outright sale.  The reason:  many states have a state capital gains tax on sale of appreciated securities and real estate. For example, if in 2017 a California donor sold stock outright, s/he would pay both federal and state capital gains tax and be able to deduct the state capital gains tax, effectively increasing his/her net profit.  In 2018, that same California donor must factor in the $10,000 SALT limitation and likely sees a reduction in his/her net profit.  When that donor gives the appreciated stock to charity, capital gains taxes are eliminated.
• ELIMINATION OF THE PEASE LIMITATION. In 2017, high income donors ($261,500 for individuals and $313,800 for joint filers) saw the value of their charitable deductions reduced by as much as 80% due to the Pease Rule.  This rule lowered deductions by 3% of the income exceeding the above thresholds.  Essentially, the Pease Rule was a surtax.  The Tax Cut and Jobs Act repeals the Pease Rule.  Combined with the higher AGI deduction percentage, high income taxpayers receive greater financial benefits for giving.
• DONOR ADVISED FUNDS (DAF). TCJA leaves donor advised funds untouched.  Donors on the bubble of hitting the new standard deduction may employ a strategy known as ‘lumping’.  Donors select a target year to exceed the standard deduction, so it makes sense to itemize.  They make a much larger gift in that year with the plan to distribute gifts over several years from their DAF.  These giving vehicles have become immensely popular in America.   Five of the top 10 largest charities in the US are donor advised funds (Source:  2017 Philanthropy 400 report).

Confused yet?  You are not alone.  No one knows with certainty how the Tax Cuts and Jobs Act will play out in the near term.  What can you as a nonprofit executive do?

• Know the sky is NOT falling. Donors give to charities for many reasons.  Tax benefits have historically been near the bottom of reasons on that list.
• Focus on relationships. Talk with your donors and stakeholders about how you are meeting your mission and how their gifts are making transformations happen.
• Build value for your agency. Know your outcomes from the good work that you do and tell your story.
• Commit to donor retention. People give to causes for which they have passion, regardless of tax implications.  Talk with your donors – embed a quick 30-second update in your communications…show your face and the faces of those whom you serve.  Keep your current donors engaged!  Median donor retention hovers around 45% (Source: Fundraising Effectiveness Project) – make 2018 the year you dedicate your efforts to keeping more special friends who give to your agency!
• Create differentiation among the sea of nonprofits. What makes you uniquely qualified to solve problems are what donors want to hear – not about the increase in AGI deductibility, removal of the Pease Rule, etc.

Donor questions about the impact of TCJA present another wonderful opportunity to tell your story, share your successes, and to involve your donors in your great work.  Let’s talk!

NOTHING IN THIS ARTICLE IS INTENDED, NOR SHOULD BE CONSTRUED, AS PROFESSIONAL ADVICE.

All the best in your development work,

John Gilchrist, FAHP, CFRE

A brief conversation with Dennis McCuistion

Dallas/Fort Worth residents have enjoyed the pleasure of watching an institution on public television, Dennis McCuistion, tackle thorny issues in our society for over 25 years.  Unreservedly independent, Dennis interviews leaders in politics, business and delivers the answers for his audience.

Dennis is the Executive Director of the Institute for Excellence in Corporate Governance at the University of Texas at Dallas’ Naveen Jindal School of Management.  I recently had the opportunity to visit with Dennis about nonprofit governance at a Rotary meeting.

Dennis spoke about two issues he sees with the many nonprofit organizations he advises. Board members of most nonprofits go on the board because they are passionate about the cause or because they are asked to make a gift and they do.  But many are inexperienced in fiduciary duties, finances such as CEO compensation issues, and strategy.  Boards must continually ask the question what are we supposed to do in the future and lead the strategy development to answer this pivotal question?

The second issue is donor base fatigue because of the stock market swings and in particular, the oil and gas prices.  Many of the oil and gas people, big donors in the past few years and one in particular Dennis is involved with said, “Instead of giving you this, we’re going to give you 20% right now.”

Dennis raises an excellent point about major giving – the source of many major gifts are assets the donor believes can be replenished fairly quickly or the income from those assets.  Nonprofits must continue to promote their case, their stories of success, and their outcomes to demonstrate their exceptional value in order to continue receiving gifts of significance.  Boards which implement best practices in nonprofit board governance are most likely to achieve success in realizing transformational gifts and advancing their respective missions.

Thank you, Dennis, for sharing your insight.

 

All the best,

 

 

John Gilchrist, FAHP, CFRE

Giving Tuesday – Just the Beginnning

One week from today is Giving Tuesday, a concept created by Henry Timms, Executive Director of the 92^nd Street Y, to remind Americans of the real meaning of Thanksgiving:  showing thanks for our blessings by helping others in need through giving to charities.   The nonprofit sector has made progress in popularizing Giving Tuesday, and much work needs to be done in the future.

On November 23, the John Templeton Foundation released the results of a study, conducted by Edelman Berland, on the consumer mentality takeover of the Thanksgiving holiday.  93% of Americans are familiar with Black Friday – the biggest shopping day of the year in terms of activity (Cyber Monday, first coined in 2005 by Shop.org, may have overtaken Black Friday in dollars spent – but that is another conversation).  Yet only 18% of Americans are familiar with Giving Tuesday.

The study revealed fascinating results on the relationship between giving and happiness.  People who classify as generous (donating time or money) are happier and more satisfied with their lives than people who are not generous – 49% vs. 33%.  Good news for charities:  the Templeton study also revealed those who daily expressed their gratitude give more than those who do not – $468 vs. $319.

So what is the point of sharing findings from a study?   Most charities have implemented their Giving Tuesday communication programs.  Focus the same amount of energy into thanking, thanking, and thanking those new donors who consciously choose your organization with a gift.  Donor retention is a huge problem in our sector, as noted in previous posts.  And most of the reasons why donors leave is within the control of charities.

Consider a Retention Wednesday.   Make that prompt, PERSONAL phone call to the donor – this is a proven way to involve board members who may be reticent about solicitation.  Tell the donor how that gift will benefit the mission (are your talking points ready?).  Invite that donor to get involved in a facet of your organization – show a real appreciation and interest in his/her story!

Giving Tuesday is an excellent way to motivate a prospect to take the final step and become a donor.  Retention Wednesday can prove most beneficial in turning that donor into an investor in your charity’s future.  #GivingTuesday  #RetentionWednesday

All the best,

 

John Gilchrist, FAHP, CFRE

 

OMG! Sweet sixteen!

As my youngest child has her sweet sixteenth birthday today, I remain in disbelief that she has grown up so fast.  Yet I still look pretty good (it’s OK – you can chuckle!), albeit with much less hair than when I first held her and told her I loved her!

I will not bore you with the details of her childhood.  But as I write this, I am truly amazed at what philanthropic milestones have occurred over the same 16 years.   Just looking at a few events in healthcare made possible through philanthropy:

• Immunizing the third world – the Gates Foundation invested $2.5 billion to immunize some 750 million children – more than twice the population of the United States – against diseases which the developed world largely has not seen in decades.
• Allen Institute for Brain Science – Paul Allen has given some $500 million to endow this center which studies how the brain processes information; basic brain structure; and what goes wrong in the brain to develop neurological disease and disorders.
• Nothing but Nets – little did Rick Reilly know when he authored that now-famous column in Sports Illustrated almost 10 years ago that he would ignite a worldwide push to eradicate malaria in the world. People all across the globe provided over 400 million mosquito nets to allow people to sleep without fear of mosquito bites, annual malaria deaths plummeted over 350,000.

Many more successes have happened and those stories need to be told about the transforming power of philanthropy in areas such as arts, education, animal welfare and so on.  Sixteen years have flown by so quickly in my household and I have seen my daughter grow into a beautiful, smart, and talented young woman.  Throughout those same sixteen years the world has witnessed many remarkable triumphs, as well as tragedies.  So what do you dream might happen in the next sixteen years?

Don’t Forget to Have a Stewardship Day

Get hyped for Thursday! North Texas Giving Day finally arrives after much preparation by over 2,100 North Texas charities and the Communities Foundation of Texas. September 17 marks the seventh year of the massive effort to raise awareness and funds for charities critical to the fabric of the North Texas area. $86 million in giving in the six prior years is most impressive by any measure.

Giving Day represents a marvelous opportunity to pull in new donors. And a meaningful way to engage your board members in thanking and welcoming and appreciating donors. How is your non-profit thanking the thousands of donors who take time out of their schedule to make their gift? Make that first thank you call fast!  Penelope Burk with Cygnus Research states over 90% of surveyed donors would be thrilled to receive a thank you call from a board member of the nonprofit. Ms. Burk’s research also shows a clear link between an expedient thank you and increased giving.

What if our sector put as much effort into a stewardship day as it does into giving day? Admittedly, stewardship does not have the same allure as securing bonus dollars yet this type of engagement provides staff, board members, and other stakeholders with the good fortune to build a relationship with the people who fuel the nonprofit enterprise: donors.

What are your thoughts on a special stewardship day sponsored by nonprofits? Your thoughts and comments are welcomed and appreciated.

Remembering September 11

I had just dropped off my oldest daughter at school.  I was listening to the “Mike & Mike” show on ESPN radio when Mike Greenberg announced a plane had crashed into one of the towers.  It was initially thought to be a tragic accident. About one minute later, he said this was no accident…

When I got to work, everybody was around the many television sets in the hospital.  The video sent a cold chill throughout everyone watching.  Questions came from all directions. How could anyone do this?  Who did this?  Would there be another attack?  If so, where was the target?  My co-workers were not panicking by any means, but an atmosphere of deep somber permeated all corners of our hospital. The clinical teams focused on patient care and those in the C-suite pulled out our disaster manuals and began to refresh our understanding of what to do, who would do what, etc.  Our CEO was in New York, so our first thoughts were of her safety.  She was able to call to let us know she was safe, but stuck at the airport as all flights had been grounded.  No one knew when she could travel back.

I was President of the Longview United Way and the annual campaign kickoff luncheon was scheduled for that day at the convention center.  A crowd of 700+ was expected for the event.  One of the campaign co-chairs wanted to cancel the event as rumors flew that President Bush was on Air Force One heading to Barksdale AFB in Shreveport about 60 miles away.  She was worried, rightfully so, that he was a target and our area could be subject to an attack.  The only answer I had for her and for the campaign leadership team was if the President was headed to Barksdale (he was), that half of the US Air Force must be around that plane.  I would not cancel the luncheon event – our campaign was too important to the thousands in the community who needed the United Way.  I guess the hubris in me refused to let terrorists win, maybe it was a feeling that we had to go on with our lives.

As part of the response that grounded commercial air traffic, the Amtrak train was stopped at the Longview station with over 100 passengers.  These folks needed a meal.  The United Way Executive Director asked me if they could join our luncheon.  Of course, they were invited.  I do not recall much of what I, or any of the other speakers, said on that day.  But I remember a sense of determination of the attendees as they left the center.  Determination that we would face the challenges brought onto our nation, while our nation’s nose was broken and bloodied, we were not defeated – not by a long shot.

Please take a moment to remember the victims in the World Trade Center, the Pentagon, and flight 93.  And especially remember those first responders who went into the towers, denying the base human instinct to run from disaster, and saved people.  Many of these first responders lost their lives in the collapse of the towers.

Far more eloquent people can express the emotions of September 11.  I just wanted to share how a group of people 1600 miles away did their part to reach out and share what we had with a group of strangers who happened upon our city. Remember we are Americans first and it is in our nature to give of ourselves to help others.

The Philanthropy Prime Directive

For the dozen or so people on the planet who have never heard of Star Trek, what follows makes no sense.  For the billions who are familiar with the nearly 50-year old franchise, and especially those who call themselves Trekkers and who are involved with philanthropy, this is for you.

Every Trekker knows the prime directive:  non-interference in other cultures to allow organic and independent development.  Philanthropy has a prime directive as well:  demonstrating our love and concern for our fellow man in as many ways as we can.  Our prime directive as development professionals can be distilled to this: making the donor so enthralled and enthusiastic about the real changes philanthropic gifts are creating that he/she becomes part of the mission of the agency – takes a sense of ownership.   Some call the process ‘donor satisfaction’ and that only scratches the surface – after all, who wants to be just satisfied when one can be energized?  Others call the process ‘donor engagement’, which is a great place to start.

What are some laudable accomplishments made possible through philanthropy?

Earlier this year, the Schiede family donated their book collection, which comprised each of the first six printed editions of the Holy Bible (including the 1455 Gutenberg Bible); early works of Shakespeare, Beethoven, Mozart, and Schubert; original letters from Lincoln; and a manuscript of the Magna Carta.  Princeton University will make these items available to scholars and the public; the value of this gift was placed at $300 million – the largest gift in the history of Princeton.

You may not have heard of Nathan Straus, but his philanthropic legacy can be found in the dairy aisle:  pasteurized milk.  While Louis Pasteur discovered that heating milk destroyed many disease-causing germs, it was not widely adopted in the US until Nathan Straus happened on the scene in the late 19^th century.  Mr. Straus gave the majority of his fortune to see pasteurized milk become the accepted norm for his adopted homeland.  Through his generosity, Straus underwrote the delivery of almost 3oo milk stations in over 35 cities.  By 1925, these stations provided nearly 25 million bottles of pasteurized milk.  Infant mortality plummeted from 125.1 per thousand in 1891 to 15.8 in 1925.  His campaign to mandate pasteurization of milk sold commercially in the US has saved millions of lives. (Source: M.D. Cohn, Lehigh University thesis, 1993)

Charities across the country have success stories.  While they may not all have the mega-impact like the gifts of the Schiede family or Nathan Straus, they definitely impact local communities and families.  As a reminder, your prime directive is to draw that donor’s attention to the good work done by your nonprofit, show the outcomes philanthropy makes possible, and ask the donor to partner with your agency to make these results a reality.

Charitable Tax Deduction – Where Do You Stand?

Much discussion ensued following President Obama’s proposal to cap the charitable deduction for high income individuals.  While that proposal was not enacted into law, the mention of change to a nearly 100 year old taxation policy generated much consternation in the nonprofit community.   Regardless of one’s political position, the question surrounding the charitable deduction remains:  what value does the charitable tax deduction create in the donor’s decision to make a gift?

Donor surveys consistently and overwhelmingly state the primary reasons for a gift include a passionate belief in the charity’s mission and work, trust in the solicitor, personal experience with the charity as a service recipient, volunteer or board member, and a conviction that the charity’s work is vital to the community.  The federal tax deduction has never risen higher than 6^th place in any survey I have seen in my 20-year philanthropy career.  Yet I submit it can spur giving, especially at the end of the year.

Let’s be honest – Americans are notorious procrastinators.  We wait until April 15 to file taxes and we have to be shamed, goaded, even cajoled into seeing a physician (applies to us men!), just two examples.  When you look at the size of charitable giving in the US for 2014, it has eclipsed the pre-recession mark – $358 BILLION!  (Giving USA study published in 2015)  Put the level another way, this amount would be the 34^th largest economy in the world, ahead of countries like Denmark, Singapore, Israel, and Finland (World Bank Development Indicators database).  Americans are without a doubt the most generous people in the world!

Going back to the posed question, what value does the charitable tax deduction create in the gifting decision?  It certainly has not boosted the overall level of giving as a percentage of the US Gross Domestic Product (GDP), which has held steady at 2% for the past 40 years (Giving USA study).  However, when you look at a possible cap on charitable deductions, I submit it would deter or limit the amount given to US charities, especially transformational gifts that charities use to create solutions the government is likely ill-equipped to duplicate.  And certainly not as efficiently as charities.

Those who itemize their tax returns have historically accounted for anywhere between 65-75% of all individual gifts to charities.  Any proposal that could jeopardize that level of giving would be detrimental to our society at a time when charitable services are needed more than ever.  The charitable tax deduction is a truly unique benefit as it does not provide a direct benefit to the itemizer, unlike the mortgage or property tax deduction.

One idea circulating in the Washington think-tank world is to change the current deduction to a tax credit with a floor on income.  Essentially, individuals would receive a tax credit, which is more beneficial than a deduction, on charitable gifts made above a percentage of income.  For example, an individual with an Adjusted Gross Income of $100,000 would receive a graduated tax credit, say 25% on gifts over and above  a 2% floor – $2,000 in this example.  A taxpayer giving $10,000 would receive a $2,000 tax credit ($10,000 in gifts less the $2,000 floor equals $8,000 at a 25% rate would yield a credit of $2,000)  How would that play in the nonprofit sector?   I frankly do not know.  Change is always difficult and changing the tax code is rarely pleasant.  How could the effects be predicted?  No precedent exists about altering the charitable tax deduction.

As we face the 2016 election season, is it possible for our country to have a rational discussion about how we wish to incentivize charitable giving?  I intend to ask candidates their positions on charitable incentives through the tax code.  I hope you do as well.  Enjoy the Labor Day holiday!

Thoughts on Overcoming Donor Objections

Learning from and building confidence in overcoming objections.  These scenarios were recently presented at a seminar of San Jose nonprofits and were positively received.   KEY POINT:  It is all about the donor and not your organization!

OBJECTION:  “That’s a lot of money you’re asking for…”

Generally not a serious objection – yet do not belittle it (Concept # 4 from the last post)

• Consider: We know it is and we don’t take it lightly. But you are one of the few in our community we can turn to for the needed leadership to make this shared vision a reality.
• Consider: Probing to see if the giving level is the real factor. Is it the amount or timing that concerns you most? 

OBJECTION: “I’m not as wealthy as those folks who make those giant gifts you read about.”

You might be dealing with a small fish in a big pond mentality. The prospect may have an issue with recognition or having a real impact with his/her gift.

• Consider: “Every gift is important to our organization, regardless of size. Only with the help and generosity of many caring friends can we achieve our vital goal.”
• Consider: “Make no mistake – you are being asked for a most generous gift. While it is significant, the benefit to our community is what counts. In this regard, your gift is quite remarkable.”

OBJECTION:  “It’s a great cause, but the timing is lousy. My business is down sharply…I may even need to restructure some of my debt.”

This is a very serious objection as the source of many major gifts is business income. The prospect may not even  be in a position to consider a major gift.

• Consider: “We are sorry to learn of your difficulties (hopefully, your research & work behind the scenes gave some indication), but you are a proven business and community leader. We are certain things will turn around for you. This is not a good time to discuss specifics about your gift opportunity. Please know how grateful we are for the opportunity to share our plans with you. Let’s plan to reconvene at a better time. You are a special friend of our organization and we are thankful for all you have done.”
• Consider: “We completelyempathize and understand your situation.   Perhaps we can agree on this opportunity and what you would hope to do once your business situation turns around. What are your thoughts and feelings about the overall concept of this project?”

OBJECTION:  “It’s a great cause, but the timing is lousy. My daughter was admitted to an expensive private college and my other daughter is getting married in the spring.”

Recognize these events happen to all of us and yes, they may affect the timing, but not stand in the way of a gift decision.  This may be a smoke screen for a lack of passion about the project.

• Probe the prospect’s feelings about the proposed project.
• Consider: “Congratulations! You and ____ must be very proud of your daughter, ___ for getting accepted at such a prestigious school.   Has ___ set a date for the wedding? Let’s put aside the gift opportunity for a moment. We would like to understand your feelings about the project.” 

OBJECTION:  “I need to discuss this with my spouse.”

Think about how your response might differ, assuming (1) you know the spouse IS important to the decision; (2) you are not sure if the spouse is important to the decision; (3) you do not know much about the spouse; and (4) you know the spouse IS NOT important to the decision (HIGHLY unlikely).

Generally, spouses discuss their philanthropic giving, so this should never be a surprise.  One should assume the spouse needs to be included in the proposal unless the primary natural partner has definitively informed you otherwise. It benefits the decision to factor in the request to discuss the project with both spouses present.

• Consider: “We are eager for you to discuss this with ____.   Perhaps it would make sense for all of us to get together Wednesday or Thursday of next week.”
• Consider: “Of course we expected you would want to talk this over with ____. We would appreciate the opportunity to sit down with both of you next week. Right now, we merely wanted to discuss the concept and determine if you share our enthusiasm for the enormous benefits this would bring to our community. How do you feel about this concept and it potential impact?”

Hopefully, these actual objections and possible responses generate conversations and planning with members of the solicitation team.  Your job is to probe beyond the words to discover the reasons behind the objection and to use that knowledge to reframe the ask.  You know the prospect has some level of agreement on the project, otherwise, no meeting would have occurred.

Your comments and feedback are welcome as always.

Thoughts on Dealing with Rejections

Some thoughts I recently shared at a seminar of nonprofit executives and development professionals in San Jose was positively received and spurred some great conversations about donor psychology and reactions.  Here are a few of those thoughts – and one big one in the graphic – to consider as you prepare your soliciting teams:

• Expect some resistance or an objection. You are asking your prospect to make a significant gift or assets and or income.
• Invite the prospect to share his/her reasons for the hesitancy.
• When answering an objection, consider using “I know, I felt, What I found…” method. I know what you mean…I felt the same way when I was asked to make my gift…what I found was this project resolves…This type of objection has helped us find beneficial solutions to other issues – if the prospect believes you are putting yourself in his/her position, that can overcome the objection.
• Never belittle any objection – that is a sure fire way to not secure the gift.
• Never allow an objection lead into an argument and do not make the objection larger than it is.
• Go back over the points of agreement to make sure the prospect still likes the project. Build on each win.
• If the amount is an issue, ask the prospect to share the specific problems it presents. Perhaps a ‘combination’ gift – both current and planned giving can make the amount manageable.
• Always provide time to consider your suggested ask before the next meeting. This gives time for consultation with family members and professional advisor(s).
• Do your best to have the next meeting in person. Explain the CEO or other key stakeholder can be present to share how this gift would make a difference.
• In the next post, let’s consider some real objections and some ways to work through them.  Your comments and feedback are welcomed as always.