Originally published February 4, 2022 in the Triangle Business Journal
As we enter the start of tax season, business leaders across the Triangle are preparing to file their individual and corporate tax returns for 2021. Nonprofit executives and board members also have taxes on their minds right now, but for different reasons. Leaders of Triangle charities are concerned their organizations’ finances may be challenged this year by the recent expiration of several temporary tax provisions, including the expanded child tax credit, the Employee Retention Tax Credit, and three tax incentives for charitable giving.
Expanded and Improved Child Tax Credit
Last year’s American Rescue Plan Act (ARPA) expanded and improved the child tax credit in three important ways. First, it increased the amount of the tax credit from $2,000 per child to $3,600 for children under the age of 6 and $3,000 for children ages 6-17. Second, it made the credit fully refundable, providing financial assistance to many low-income families who don’t normally pay income taxes. Third, it provided advance payments of the credit for the final six months of 2021, providing immediate cash assistance to millions of families in the form of monthly checks.
The expanded and prepaid child tax credit helped lift many families with children out of poverty. It also provided extra monthly spending cash for middle-class families, including many staff at local nonprofits and businesses. For many families, this money helped pay for child care, food, home and car repairs, medical expenses, and more.
The expiration of the improved child tax credit likely will increase burdens on nonprofits that provide services to children and families, as more North Carolina families are likely to face economic challenges. Businesses are also likely to feel the sting of the end of the child tax credit improvements, as many families are being forced to cut back their spending on many goods and services with the sudden loss of monthly checks from the IRS.
Employee Retention Tax Credit
Last year, many nonprofits and businesses relied on the Employee Retention Tax Credit (ERTC) to help fill in budget gaps caused by COVID-related revenue losses. For 2021, the ERTC was available to businesses or nonprofits whose operations were shut down due to pandemic restrictions or that had revenue losses of 20 percent or more for a three-month period (compared to the same period in 2019). The refundable payroll tax credit could cover up to $10,000 per employee for each eligible organization.
The bipartisan infrastructure bill President Joe Biden signed into law in November ended (retroactively) the ERTC on September 30, three months before the originally scheduled expiration date. Many nonprofits planned their 2021 budgets in anticipation of receiving this financial relief through the end of the year. As a result, the early expiration of the ERTC has left some nonprofits – and certainly many businesses as well – scrambling to make up for the lost cash on hand at the start of 2022.
Incentives for Charitable Giving
At the beginning of the pandemic in 2020, Congress made temporary changes to three tax laws to help encourage individuals and businesses to give more generously to nonprofits.
Universal Charitable Deduction. In 2020 and 2021, taxpayers who used the standard deduction (which includes the vast majority of North Carolinians) were eligible for a special tax deduction for some of their charitable contributions (up to $300 for individual taxpayers, and up to $600 for married tax filers). With the expiration of the universal charitable deduction, most North Carolinians no longer receive tax deductions for their charitable contributions.
Higher Limit on Deductibility of Corporate Charitable Contributions. Normally, corporations can make tax-deductible charitable contributions up to 10 percent of their taxable income. For 2020 and 2021, Congress increased this limit on corporate charitable deductions to 25 percent of a business’s taxable income.
Lifting of the Cap on Charitable Contributions. Wealthy donors who itemize their deductions can only deduct charitable contributions valued at up to 60 percent of their adjusted gross income. Congress lifted this 60 percent cap in 2020 and 2021, giving donors tax incentives to make significantly larger charitable contributions the past two years. For example, a taxpayer with $1 million in adjusted gross income would normally only be able to deduct $600,000 in charitable contributions, but in the past two years, they were able to deduct $1 million in contributions.
These temporary tax incentives for charitable giving helped offset some of nonprofits’ financial challenges from the pandemic, including loss of revenue and increase in need for services.
David Heinen is the vice president for public policy and advocacy for the North Carolina Center for Nonprofits. Reach him at firstname.lastname@example.org.