Mark Koscinski NFP

Memorial Day Musings

Memorial Day Musings

Despite the fact we have had some decidedly “unsummer like weather” in the Northeast, Memorial Day is the unofficial start of the summer.   It is also the start of the real negotiations on the tax bill currently  moving through Congress.  Speaker Mike Johnson has said he would like to get the bill to the Senate for a vote before Memorial Day.   The bill will change as it moves through the Senate and back to conference,  but let’s take a look at how the current provisions in the bill  might impact the not-for-profit  (NFP) world.

Congress appears to be ready to increase the allowable deduction for state and local taxes (SALT) on an individual’s federal income tax return.  This may have a positive impact on NFP organizations. The hike from the current $10,000 cap on SALT deductions  for married couples to $40,000 is substantial.  There is a phase-out for those making more. At the same time, the bill proposes a hike in the standard deduction to $32,000 for a married couple.  On the face of it, these changes could make it more likely individuals can  itemize deductions on their federal income tax returns. This means it will be easier to deduct charitable contributions again.  Previously, the low cap on SALT deductions precluded people from itemizing since the standard deduction is so high. If you live in a “Blue” State, you pay a pretty hefty state income tax and property tax, most of which is not deducible.  Increased charitable contribution deductions may mean more donations to qualified NFPs.  Onc can only hope at this point. 

There have been two other developments in the NFP space worth mentioning.  As I write this, the U.S. Supreme Court has deadlocked on the legality and constitutionality of state  funding of  charter schools. The whole issue of charter schools is a contentious one, with public school unions opposing any funding for them at all, let alone those schools chartered by religious groups. There was no opinion issued by any of the Justices, so it is difficult to determine exactly what their thinking was on the matter. The tie vote was possible because Justice Barrett, a practicing Catholic, recused herself from the case.  The Court affirmed the decision of the Oklahoma Supreme Court that state funding of a religiously affiliated charter school was unconstitutional. In recent years the Court has been very accommodating to  religious groups.  Perhaps there was something about this case that Chief Justice Roberts, the presumed swing vote, did not like. Only time will tell if this ruling will stand. For now, the ban on state funding of religiously backed charter schools  applies only in Oklahoma and not nation-wide. 

The second development is the cost-cutting activities of the Trump Administration.  Many have been blocked by  federal district court judges. The issue of the “universal injunction”  will also be decided by the Supreme  Court in the near future.  I believe some of the cuts will in fact be enacted. Which will survive and which will be blocked is still up in the air, as well as any impact on NFP organizations. 

In closing, I want to wish all of you a wonderful Memorial Day.  And remember to contribute to your favorite charity.  It is the American thing to do.  Even if you don’t get a tax deduction. 

Mark Koscinski NFP

Lessons From the New IRS Mileage Rates

Each year the IRS updates its allowable mileage rates.  It recently announced the following rates for 2023:

65.5 cents per mile for business use;

22 cents per mile for medical purposes; and

14 cents per mile for charitable purposes.

The latter two rates are unchanged from 2022. The new business mileage rate has increased by three cents per mile from the previous year.  The IRS claims the business rate is based on the fixed and variable costs of operating a vehicle and the medical reimbursement rate is based only on variable costs. Finally, the charitable contribution rates are determined by statute.  How do the new rates impact NFP managers? 

Right off the bat, it means costs will rise.  If your employees are using their vehicles for work purposes and you reimburse them at the IRS mileage rate you will need to pay them three cents per mile more than you did last year. However, that is not the real impact of these rates. The true impact may be far more subtle.  

Let’s dig beneath the surface of these numbers.  If we accept the IRS computations at face value, 22 cents per mile is the variable cost ( fuel, maintenance, etc.) of operating a vehicle. An additional 43.5 cents per mile then is the fixed cost of vehicle operation.  In short, the fixed costs or overhead application rate is about twice that of the variable cost. The largest component of the fixed cost is the depreciation of the car, which one source claims to be about 40% of the entire cost of operating the vehicle. 

This is just one example of a trend in the American economy. The percentage of fixed to total costs of providing products and services is rising. This is no less true in the NFP sector than in other industries.  There are many reasons for this, including the expanded use and cost of technology to conserve on personnel costs by improving productivity. NFP managers need to keep this principle in mind when they are applying for grants and costing out services.  Yes, we are not in the business of making a profit, but we do need cash flow to keep the doors open, provide a living wage for our employees, and fulfill the organization’s vision and mission.  Not taking into consideration fixed costs is a losing proposition in the long run and will lead to the eventual demise of the organization. Some of you may respond by saying many funders will not provide for overhead. My answer to that is to take a look at activity based costing, a topic previously discussed in this blog…

The second takeaway is the impact on volunteers and donors.  The charitable mileage rate is about two-thirds of the variable cost of operating a vehicle. So, the volunteer who can itemize on their tax returns (admittedly, few and far between these days because of the higher standard deduction on the federal income tax return) actually “lose” money driving to your facility to volunteer.  The deductible amount of charitable driving doesn’t even cover the variable cost of operating the car. Using this math, it might be better for  the volunteer to simply write a check that is completely deductible than to drive down to your facility and volunteer.   Obviously, this is not a perfect substitute for actual volunteering, but this problem is something NFP managers need to be aware of.  Some strategies for helping defray costs would be to allow volunteers to do as much as possible remotely so they can “bunch” their physical travel time to minimize expenses and to consider paying small stipends for actual time spent on premises. This will increase costs but the stipend says yes, we know it costs money for you to come here but we want to show our appreciation. 

It is troubling that Congress and the states are  so stingy with the charitable mileage rates.  In two scant years (2025) the Trump era tax changes will lapse and the higher standard deduction will disappear.  If this is the case, more and more people will begin itemizing again. Consider contacting your federal and state legislators to push for higher deductible mileage rates. The NFP  sector does a great job helping out those in need. It is also vital to the health of the economy but very few people talk about this. It is time we did. Let our legislators know how much the charitable contribution deduction and the charitable mileage deductions mean to our volunteers and donors.  Perhaps this will increase the volunteer participation in NFP organizations. 

Cost of operating a vehicle: https://companymileage.com/howmileageratedetermined/

Mark Koscinski NFP

Tax Law Changes in 2022 Affecting NFP Stakeholders

As we begin the New Year, changes in the federal income tax law could negatively impact NFP organizations.   Let’s start with charitable contributions.  First, the $300 ($600 for married couples) charitable contribution for nonitemizers is set to lapse.  Smaller donors may be less willing to make donations to their favorite charities.  On a larger scale, the cap on corporate charitable contributions will be reduced from 25% of taxable income before charitable contributions to 15% of the same number.  Additionally, individuals could donate 100% of their adjusted gross income to charity in 2021.  That cap will be reduced to 60% in 2022.  

 These provisions were enacted to assist NFP organizations during the pandemic. Retaining them does not seem to have been a high priority in the recent negotiations between the Biden Administration and Congress in passing the infrastructure bill and Build Back Better proposals. It seems fairly certain that these provisions will in fact lapse since there doesn’t seem to be a lot of momentum behind them.  The Biden Administration campaigned on increasing corporate taxes and taxpayers with an adjusted gross income over $400,000, those more likely to donate a higher percentage of their AGI to charity.  It seems unlikely there will be any wind behind the sails of giving additional tax deductions to those groups the Administration  said were not paying their fair share of taxes already. 

On the cost side of the ledger, the IRS mileage reimbursement rate will increase by 2.5 cents from 2021 to 58.5 cents in 2022, an almost 4.5% increase.  This jump reflects the recent inflation experienced in the American economy. The new rate will continue to put cost pressure on NFP organizations who may not be able to afford even the current reimbursement rates for their employees. The aforementioned inflation can also deter donations to NFP organizations as salaries and wages struggle to keep up with increased costs.  

Many other provisions of the tax code potentially affecting  NFP organization stakeholders such as the enhanced child tax credit and earned income tax credit were included in the Build Back Better bill, recently torpedoed by the projected “No” vote of Senator Joe Manchin. NFP management will need to watch what happens to the bill in 2022.  The best bet at this point is for Democrat Congressional leaders to break up the bill into smaller pieces and then try to sell them one at a time to Manchin, who would provide the crucial vote for passage in the Senate. If this were to happen, perhaps some of the current provisions would be reintroduced and become retroactive to the beginning of the year. Only time will tell if this will happen. This course of action seems unlikely in the heated political discussions of today, but cooler heads may prevail in the months ahead.

Mark Koscinski Uncategorized

Houses of Worship and the CARES Act

The new CARES Act signed by President Trump on March 27, 2020 provides potential relief to financially stressed not-for-profit (NFP) organizations.  Congress and the Administration realize NFPs employ approximately 10% of the workforce and constitute about 5% of Gross Domestic Product.  Even though this is a small portion of the economy, there cannot be a true economic recovery without this sector rebounding also.  This blog addresses one specific group of NFP organizations:  houses of worship (called Churches hereafter for the sake of simplicity.)

The activity of clergy has been severely curtailed by recent events, and worship gatherings are limited to ten people in many if not all areas. Even though some Churches are live streaming their services, donations have dropped precipitously in many places.  One of my colleagues remarked it is often a challenge to get people to donate in the first place and the current environment makes this situation even more difficult. Increased unemployment and economic uncertainty will lead to decreased donations putting stress on Churches’ (and other NFP organizations) finances.  

One way to alleviate some of the stress is to apply for a Payroll Protection Plan (“PPP”) loan administered by local banks.  The application form is extremely simple and can be found at the SBA website.  The bank will lend 2.5 times the average monthly payroll and the loans will be forgiven if certain less than onerous conditions are met.  Houses of worship should apply for the PPP loans if they meet  the basic criteria of the program contained right on the loan application itself.

Churches  should also take advantage of payroll tax deferrals as well. Payment of the employer portion of Social Security taxes may be delayed until the end of this year as well.  It is critical to note the Medicare portion ( both employer and employee portions) and the income tax withholding from employees must still be remitted by the normal due date. This is a reasonable requirement since the vast majority of that money is a deduction from the employee’s paycheck and therefore belongs to the employee. Half of the deferred payroll taxes payment may be deferred until December 31, 2020 and the other half until the same time the following year.  Please note this applies to the federal payroll taxes only and not state payroll taxes.  Churches should look for local guidance on this subject.

Finally, Congress has now allowed a $300 charitable contribution deduction to adjusted gross income in 2020.  This means at least a portion of donations made to Churches will be tax deductible.  Previously, charitable contributions were considered itemized deductions and often did not result in a tax benefit since the standard deduction is now so high.   The cap on charitable contributions has also been increased from 60% to 100%  of adjusted gross income.

While this may boost contributions somewhat, Churches and the NFP sector as a whole will need more assistance than this.  The President has recently come out and said he is not opposed to another round of fiscal stimulus.  Perhaps a new stimulus package will be more charitable to charitable organizations.

In any event, this will be an unfolding story, with a lot more to come.