Threats to Tax Exemption and Incentives for Charitable Giving

Threats to Tax Exemption and Incentives for Charitable Giving

Senate Tax Proposal

The Senate tax plan, which was passed as part of the Senate's version of the state budget for FY2015-17, would have made three changes that would harm nonprofits:

  1. The tax plan would effectively have eliminated state tax incentives for charitable giving. Currently, individuals can deduct the full amount of their charitable contributions on their state taxes but can only deduct a total of $20,000 in mortgage interest and property taxes paid. Under the proposal, charitable contributions, mortgage interest, property taxes paid, medical expenses, investment interest, job expenses, and other federal itemized deductions would all have been included in that cap. Many taxpayers would reach the $20,000 cap from the total of their other deductions, so they would have no state tax incentive to make charitable contributions. Furthermore, because the state standard deduction would have gone up (to $17,500 in 2016, increasing to $18,500 by 2020), there would have been very little tax benefit for any individuals to itemize their deductions on state taxes. Based on the impact of a similar cap in Hawaii, the Center estimates that this proposal would have  reduced charitable giving by between $60 million and $900 million annually in North Carolina.
  2. The proposal would have created new taxes on large nonprofits by lowering the existing cap on nonprofit sales tax refunds. Under current law, nonprofits must pay sales tax on their purchases, but can apply for semi-annual refunds of the first $45 million in these taxes paid each year. The Senate plan would have phased down this cap to $1 million per year by 2020. If legislators were to follow up on such a downward trend in subsequent years, nonprofit sales tax exemption could eventually be eliminated. New taxes on large nonprofits could also jeopardize some of the programs and services that they provide in collaboration with smaller nonprofits in their communities.
  3. The plan would have cut into reserves of almost every nonprofit by restructuring nonprofit sales tax refunds from a semi-annual process to an annual process. This could have hurt cash flow for nonprofits by allowing the state to hold onto nonprofits’ money for an additional six months. 

The Center has prepared this chart comparing the estimated impact of these proposals on nonprofits.

Separate Senate Legislation Would Have Eliminated Nonprofit Sales Tax Refunds for Reimbursed Purchases

On July 23, the Senate approved its version of a bill (S.605) that would, among other things, limit sales tax refunds for many nonprofits. Two provisions affect nonprofit sales tax refunds:

  1. The bill would clarify that purchases of prepared food or accommodation rentals for a nonprofit employee would not be eligible for sales tax refunds unless the purchase is made directly by the nonprofit. This change would take effect as soon as the bill is signed into law.
  2. It would have made all purchases of goods and services, except for building materials, ineligible for sales tax refunds if they are purchased through reimbursement of an “authorized person” of the nonprofit. This would mean that your nonprofit would no longer be eligible for the refund of sales taxes when your staff, board, volunteers, or contractors purchase goods and services for your nonprofit’s use and are reimbursed by your organization. This change would have taken effect on January 1, 2016.  The House Finance Committee removed this provision in its version of S.605, which did not pass the Senate, but it could be reconsidered in 2016

Let us know whether your nonprofit would be affected by the limitation on sales tax refunds on reimbursed purchases. The Center will continue to work with the House to try to prevent tax changes that add red tape and reduce revenue for nonprofits.

A Third Senate Bill Would Have Capped Nonprofit Sales Tax Refunds

A Senate bill (S.700) would have severely limited nonprofit sales tax refunds. Under current state law, nonprofits must pay sales tax on their purchases, but they can be reimbursed for the first $45 million in sales taxes they pay each year (which is more than any nonprofits actually pay in sales tax). S.700 would have reduced this cap on sales tax refunds to $100,000 per year, creating new taxes for hundreds of nonprofits. This could have been the first step in taxing all 501(c)(3) nonprofits in North Carolina.

The N.C. Center for Nonprofits was concerned that S.700 would create unintended harm for communities across the state that are served by nonprofits. If enacted, the new tax would have taken precious resources away from churches, hospices, YMCAs, Habitat for Humanity, hospitals, colleges and universities, senior care organizations, and other charitable nonprofits.

At a time when more than two-thirds of North Carolina nonprofits lack the resources to fully meet their communities’ growing demand for their services, this would mean that fewer North Carolinians would have access to nonprofits’ essential services. This new tax also would have led to job losses in all parts of the state. 

The Center opposes legislation that would impose new taxes on nonprofits and will lead the fight to protect nonprofit tax exemption.