Nonprofit tax treatment in limbo

With the federal deficit commission proposing radical changes to the tax treatment of charitable donations, tri-state area nonprofits were uncertain on the impact the measure could have on their revenue streams.

In recommendations titled “The Moment of Truth,” the National Commission on Fiscal Responsibility and Reform proposed eliminating the Internal Revenue Service”™s itemized deduction scheme for charitable donations, replaced by a 12 percent tax credit ”“ but only for donors who set aside at least 2 percent of their adjusted gross income for charity.

The commission also suggested curtailing the tax exemption for interest levied on municipal or state bonds, a key part of the tax code allowing institutions like hospitals to raise money for large capital projects.

Nonprofits are only just beginning to recover their footing coming off a strong year in the stock market that has rekindled giving, though the sector faces renewed challenges next year due to pressures on lawmakers to cut local, state and federal budgets.

According to the Nonprofit Research Collaborative, while 35 percent saw contributions increase during the first nine months of 2010, another 37 percent suffered a decline as the Great Recession continued to clamp shut some household and corporate pocketbooks, even as many charities found demands for their services increase.

A separate study examining giving by wealthy individuals nationally between 2007 and 2009, however, shows the extent to which the recession affected giving by the private sector. Gifts dropped 35 percent in size between 2007 and 2009, according to Bank of America Merrill Lynch and the Center on Philanthropy at Indiana University, and more than a third of wealthy donors stopped giving to at least one charitable cause.

According to the Indiana University report, in many cases this past year organizations found themselves cut off from some donors for holding out the hat one too many times, or in asking for an amount the donor deemed inappropriately excessive. In Connecticut, the Fairfield County Community Foundation gave advice to its nonprofits to call on tried-and-true donors for additional contributions during the crisis.

“You know that Jack Mitchell book ”˜Hug Your Customers?”™” said Susan Ross, president of the foundation. “We were practically telling (our nonprofits), ”˜kiss your donor on the lips.”™ ”

Foundations are expected to increase disbursements only modestly next year, according to a survey by the Foundation Center, but the New York City-based organization added that the recession is not expected to result in major changes in how foundations operate, including in their core grant-making function.

Still, in the Nonprofit Research Collaborative study, just 7 percent of responding organizations stated their finances placed them in jeopardy of folding in the coming year.

The precarious state of New York public finances is not helping the cause. According to an Urban Institute study published this fall, New York has the ninth worst record in the country when it comes to paying its nonprofit contractors on time.

In May 2009, a report by the Office of the New York State Comptroller found that up to 87 percent of contracts with nonprofits were approved late, forcing them to perform services without a contract in place and without any payments. As a result, an increasing number of nonprofits have resorted to borrowing.

In a survey conducted by the New York Council of Nonprofits, the state”™s record with its contractors has only worsened this year, and NYCON responded by creating an ombudsman program to help nonprofits navigate the state contracting and payments process.

“In essence, government appears to be expecting charitable donors ”“ who are also taxpayers ”“ to subsidize its cash flow,” said Doug Sauer, CEO of NYCON. “We need to fix this system.”