Charities Prosper Under New Laws, Economy

Charities Prosper Under New Laws, Economy
Photo of Kevin Horn by Jason Burt

An improving economy and a state full of philanthropic hearts have meant another good year for Arkansas charities.

Specific numbers haven’t been calculated, but officials with nonprofits in the state said donations are up from a year ago. This has come despite concerns that tax law changes in early 2013 might have caused complications with charitable contributions.

So far, those concerns have not proved justified.

“Taxes have a marginal effect,” said Kevin Horn, a tax partner with BKD LLP of Little Rock. “People give to charity to help others.”

There were gloomy and dire predictions when Congress passed and President Obama signed into law the American Taxpayer Relief Act in January 2013. The law, among other things, raised the marginal tax rate from 35 to 39.6 percent for individuals who earn more than $400,000 (or $450,000 for couples filing jointly) and bumped up the tax rates for capital gains and dividends.

It also brought back the so-called Pease Limitations — named after former Rep. Donald Pease, D-Ohio — that limit the amount of deductions that can be claimed by those with income over $254,200 (or $305,050 for joint filers). Pease was first put into law in 1991 and, after several temporary extensions, was repealed — also temporarily, as it turned out — in 2012.

Higher taxes generally cause people to donate more — to lower their tax base — but the Pease Limitations prevent that full realization. Pease reduces allowable deductions by 3 percent for every $1 a filer earns over $300,00, Horn said, so someone who earns $1 million would lose $21,000 in deductions.

“The higher tax rates were somewhat offset by the return of [Pease],” Horn said. “It’s closer to a push.”

Most experts say Pease is not really a limitation of deductions but a surtax on income because of the way it is calculated. It seems, in the short term, that the revived economy has kept Arkansans in a giving mood.

Donations Rise in 2013

A report by Giving USA, a public service initiative of the Giving Initiative, said charitable giving nationally in 2013 rose to $335.17 billion, an increase of 3 percent. Gifts from individuals totaled $240.6 billion, an increase of 4.2 percent.

“Because the economy continues to improve, they’re not saying taxes are an issue,” said Angie Albright, the director of programs for the Arkansas Nonprofit Alliance in Little Rock. “We’re not hearing that from any nonprofit.”

John Erck is the senior director of development and external relationships for the University of Arkansas at Fayetteville’s Walton College of Business and one of the university’s top fundraisers. He said one donor he contacted told Erck he would not be donating this year because of taxes.

That’s an outlier, though. Erck said fundraising this year is ahead of last year’s pace.

“It’s a pretty individual thing,” Erck said. “That hasn’t had a huge effect on us. It’s not something we’ve noticed.”

Angela Frazier, the tax and personal advisory partner with EGP LLC of North Little Rock, said Pease is just an “unfortunate” fact of life for some of her clients. It hasn’t significantly changed any charitable leanings, though, she said.

“We haven’t seen people saying, ‘Because of Pease Limitations, we’re not going to do X,’” Frazier said. “It definitely does factor in. It’s a hidden income tax increase. You have to account for that. They’re continuing to make charitable contributions.”

Horn said it’s really basic when it comes to donations: If a person has had a good year, he or she will want to share that with a favorite charity or two. “The real driver is if people had a really good year or if they have had a really good appreciation of stock,” Horn said. “It’s a function of a little bit better economy. It’s the success of whatever the client has that generates the gifting spirit.”

Horn said taxes are a secondary driver for the most part but do have an effect on how a client will donate. He said some clients will bunch their contributions in one year or donate noncash assets such as appreciated stock.

The stock market’s strong 2014 has certainly helped noncash assets. “If they sold and cashed out, they would be taxed on capital gains,” Horn said. “By giving stock directly, you’ll get a full market deduction on the stock. It’s the best of both sides.

“Many of our clients continue to do that. In ’14 with the rise in stocks and appreciation of assets, I’ve seen more noncash gifting.”

Jill Wagar, director of advancement at Crystal Bridges Museum of American Art in Bentonville, said receiving stock as a gift is common in the nonprofit fundraising world. Crystal Bridges’ donations are up 13 percent this year, Wagar said, and income tax rates and Pease Limitations don’t have much effect either way.

“What we’re finding is most of our donors are more motivated by support of the mission and the museum than by taxes,” Wagar said.

IRA Rollover Provision

There is one significant adjustment the federal government could do to spur further charitable contributions. The IRA contribution rollover provision became law with the 2006 Pension Protection Act but was wasn’t extended after Dec. 31, 2013.

The provision allowed IRA holders 70½ years old — the same age at which they are required to receive taxable distributions from their IRA — to donate up to $100,000 tax free to qualified charities. An extension, which could be retrofit to include 2014, awaits passage by Congress.

“The hope is the House and Senate will reach an agreement,” said David L. Thompson, the vice president of public policy for the National Council of Nonprofits in Washington, D.C.

“It needs to be made permanent. People can’t plan if it’s on again, off again.”

Thompson said IRA donations are a boon for smaller nonprofits. Arkansas, according to Albright, has nearly 8,200 nonprofits, many that operate on small-scale budgets that rely on $50 and $100 donations.

“We’re hopeful it might be extended,” Frazier said. “There is some hope for that to come back to life in 2014. If that was brought back into law, it’s a great way for people to reduce their adjusted growth income.

“We have clients who are interested in doing that. It’s a huge benefit to the nonprofit community.”

Jody Dilday is the executive director of the Single-Parent Scholarship Fund of Northwest Arkansas, which provides funds for college expenses in Washington, Madison and Carroll counties. Her annual budget is $800,000, which she expects to hit this year.

Dilday, like Wagar at Crystal Bridges, said she has seen foundations become more strategic as far as the number of charities that they fund. Most nonprofits survive because they have a diverse pool of donors, so adding IRA donors to the mix is critically important to smaller nonprofits such as Dilday’s.

“We have a good mix, but we’re seeing some changes in foundation giving,” Dilday said. “With individuals, we’re doing very well. The IRA is our great unknown. We do have some aging donors. That would be an ideal time for us to reach out to them.”

The only things that would certainly slow down contributions are another economic downturn or a law that removed all deductions from charitable contributions. Giving USA said the 2013 donation levels, which represented a third consecutive year of increases, still have not reached pre-recession levels of contributions.

“I’d say it has been a pretty good year,” said Corey Jennings, director of not-for-profit and government at BKD. “Most charities took a hit there. We’re finally climbing out of that.”