Last updated: February 10, 2022
David Heinen, Vice President for Public Policy and Advocacy, North Carolina Center for Nonprofits
As we enter the start of tax season, nonprofit leaders are concerned that 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.
The 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 six 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, entertainment, and holiday gifts last summer and fall.
The expiration of the improved child tax credit will likely increase burdens on nonprofits that provide services to children and families, as more North Carolina families are likely to face economic challenges. Nonprofits that operate on a fee-for-services model are particularly 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.
The 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% 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 that President Joe Biden signed into law in November 2021 ended (retroactively) the ERTC on September 30, 2021, 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 the 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.
- The 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 10% of their taxable income. For 2020 and 2021, Congress increased this limit on corporate charitable deductions to 25% of a business’s taxable income.
- The Lifting of the Cap on Charitable Contributions. Wealthy donors who itemize their deductions can only deduct charitable contributions valued at up to 60% of their adjusted gross income. Congress lifted this 60% 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. Nonprofits are hoping that North Carolinians will continue making generous charitable contributions in 2022 even if these donations no longer bring with them tax breaks.
There are still opportunities for policymakers in Washington to provide financial relief to nonprofits and businesses by reviving these tax provisions this year. The reinstatement of the improvements to the child tax credit remain on the table as President Biden and the U.S. Senate negotiate on a renewed “Build Back Better” spending plan. National nonprofit leaders continue to push for reinstatement of the enhanced charitable giving incentives in these negotiations. Also, a majority of North Carolina’s congressional delegation have recently signed onto legislation to provide tax relief to thousands of local nonprofits and businesses by retroactively reinstating the ERTC for the fourth quarter of 2021.