In this episode, Jenée Iyer, contributor and former Chief Editor of Research for AMT Lab, interviews Professor Philip Hackney at the University of Pittsburgh’s School of Law. They discuss the recent Tax Cuts and Jobs Act, how it may affect charitable giving, and the tax implications for cryptocurrency.
Transcript:
[Musical Introduction]
Alyssa: Hello AMT Lab listeners, and welcome to an interview episode with the Arts Management and Technology Lab. My name is Alyssa and I am the Podcast Producer. In this episode, contributor and former Chief Editor of Research, Jenée Iyer, met with Professor Philip Hackney at the University of Pittsburgh’s School of Law. The two discuss the recently adjusted tax deductions law and how it may affect charitable contributions. This interview takes place outdoors during a sunny day and therefore, you may hear some wind, birds, cars, or other signs of life. We hope you enjoy this episode, brought to you by AMT Lab.
[Musical Interlude]
Jenée Iyer: I’m Jenée Iyer and I'm here with the Arts Management and Technology Lab and our guest for today is Professor Philip Hackney. Professor Hackney is a Professor of Law at the University of Pittsburgh and specializes in tax exempt organizations. He's written extensively on nonprofits and recently testified before the House Committee on Oversight of Nonprofit Organizations.
Professor Philip Hackney: Great, yeah.
Jenée: Thank you so much for joining us here today.
Prof. Hackney: Thank you for having me.
Jenée: So, I wanted to kind of pick your brain a little bit on what you're seeing in the nonprofit sector now as we're starting to get a sense of the results, of the impact that the tax overhaul is had recently, and starting particularly with charitable giving. And you know that we had some restructuring that happened and so I wanted to kind of get you-, to kind of give us a rundown on what that restructuring was, and then we'll kind of take it from there.
Prof. Hackney: Yeah, I think the, um, the biggest aspects of the Tax Act, many people refer to it as “tick-ja” (TCJA). So, if I say “tick-ja” (TCJA), you'll know what I mean. [laughter] The Tax Act. Um, it changed the ability of most people to deduct money that they give charitably. Most individuals give some amount of money charitably and actually, a relatively small number of people were able to deduct before, but it was around 30% of the population. Quite a bit of the middle class was able to deduct contributions that they made charitably, particularly if they had a home with interest payments on that and taxes that they paid locally. The TCJA increased the amount of a standard deduction and that high technical stuff but that means for a couple, they have to have $24,000 of expenses, of interest, and taxes and so on, before they can begin to take a charitable contribution deduction. This means most people are not going to get a benefit anymore from contributing charitably, anywhere from seven to 9%. This is mostly fairly wealthy people, not necessarily, but it's going to, just as a matter of fact because of the incentives changes, change the way people donate it. We haven't seen huge changes yet. I think Giving USA put us down about three or 4% last year.
Jenée: Is that about what you would expect to what people were predicting when this first came out?
Prof. Hackney: Frankly, no one had any idea where it was going to go. And it's not even clear that the tax law was the cause of that change. There was a downturn in the market at the end of December - many people do their charitable giving then. The reality is much individual giving had been going down over the years, more giving has been coming from wealthier individuals anyway. So, it's not entirely surprise-, in fact private foundation giving, which typically is wealthier individuals in the sense anyway, actually went up.
Jenée: Yeah, I saw that the Giving USA report that came out in June of this year, said that despite the individual giving decline, that the overall declining giving was only about 1.7% because of the foundation uptick that you're mentioning.
Prof. Hackney: Yeah, exactly. So-, and this has been a trend that's been going on longer than the tax law. I think most people didn't expect to see a huge effect in 2018. Why? Because most people probably weren't even aware of the change in the tax law. They probably didn't become aware until they started filing their taxes, the vast majority of people. There were a lot of people who used to give, even though they didn't get a charitable contribution deduction anyway, there’s a whole study of that effect that people think they're going to get it and so they give it and it doesn't matter anyway. But…
Jenée: And do you feel that the impact has been relatively even across markets, or do you feel like, perhaps, arts organizations were less impacted, whereas religious organizations may have been more impacted? Or…?
Prof. Hackney: I think it depends. I mean, like if we talk about arts organizations, I know of arts organizations that are smaller that are likely impacted. Larger institutionalized arts organizations, my guess is not so much. Again, this is an effect of those that are drawing from a wealthier crowd probably are doing better, if anything, those who are drawing from less, less so. There was another effect as an incentive matter is that tax rates for wealthier individuals went down, so there might be a reducing effect there as well at the same time. Hard to know.
Jenée: And after the initial passage, did the states step in and do anything to sort of, kind of attempt to mitigate the impact that this could have had on nonprofits?
Prof. Hackney: Um, I didn't see many efforts to do that. In fact, if anything, many states were probably doing things that would harm contributions to nonprofits themselves. Because of this, the tax law also reduced the amount of deductions an individual can make regarding their state taxes. So, when blue states where there’s high tax - New York, Massachusetts - they can only deduct up to $10,000 and their sales taxes or income taxes are much greater than that amount. Many of the states were stepping in to try and create a charitable contribution deduction to the state to get around that law. Most of that's been shut down by the IRS. So…
Jenée: Makes sense. So, beyond changing the charitable contributions thing, the, uh, tax overhaul also changed the way that nonprofits themselves pay some of their taxes.
Prof. Hackney: Yep.
Jenée: For example, one amendment now require them to pay a little bit more attention to their unrelated business income, particularly with separating out different trades or businesses, whereas before they could sort of amalgamate them all together and offset some of the gains and losses. And now they have to do them line by line - what sort of impact have you seen from this?
Prof. Hackney: Yeah, so this one takes a little bit of building up, right.
Jenée: Okay.
Prof. Hackney: These are organizations that are nonprofit that don't pay taxes. But, it turns out in the 1950s, Congress enacted a law called the Unrelated Business Income Tax, where if you do something that's not really your nonprofit activity to earn money, you got to pay tax on it. I'll refer to this as UBIT for short. UBIT, generally, is only taxed on those things that are businesses, but what a nonprofit could do, similar to people engaged in a tax shelter, is perhaps engage in one loss activity and one for profit activity, offset those, and minimize their taxes. I think this silo-ing effect that Congress was doing, effectively what they said is, “all right, so you got a lawn mower business, a cake baking business, I don't know, a Spaghetti Factory. And you're running those, somebody gave you these things, and you just kept on to it”. It used to be that you could use the cake baking business losses to offset the other. You can't do that anymore, it raises the sum total of taxes on the organization as a result.
Jenée: Yep.
Prof. Hackney: My guess is something we'll see, and you might in arts organizations to the extent they've inherited something like this where they're engaged in a business, is that they're going to be more likely to put that into a for profit entity.
Jenée: Okay.
Prof. Hackney: If it's in a for-profit entity, you can still combine them together. Whether the IRS cracks down on that or not, who knows, but they're going to be looking to reshape those types of businesses that use that [inaudible].
Jenée: That makes a lot of sense. And the other sort of taxation bit that this changed had to do with employee benefits, particularly transportation and parking benefits, to the extent that it imposed a 21% income tax on nonprofits for expenses that they pay when they provide their employees with these services. I’ve heard some chatter that people are thinking about, perhaps they'll repeal this - what sort of impact and status is this measure?
Prof. Hackney: Yep. So, a lot of folks have referred to this as the “church parking tax”. So, it's possible that your audience has heard of this “church parking tax”. It's not a church parking tax, but that was a way for a lot of Republican Congressmen, and Democratic Congressmen/women to sell the idea that we need to get rid of this thing. They felt like they made a mistake. They had no idea, I think, of the effect that they were having. Let me start with something though first, which is why did this end up happening? Well,
Congress, through the tax code, allows employers to give benefits to their employees, they’re non taxable. It's kind of like income. If I get a transit pass, going back and forth between work every day, that is income, they're paying me, but it's not considered income. They can give me these fringe benefits without giving me tax and that can kind of set up a situation where it's beneficial to larger employers able to do that type of stuff. Well, Congress also was bothered by the fact that these organizations were also deducting those costs. So, not only were you not including it in tax, but they were deducting the amount. So, in a sense, this was a subsidy to the organization, not just to the individual and they wanted to end that. So they ended for-profit businesses’ abilities to deduct that amount - they can still give the fringe benefit, but the candidate cannot deduct the amount. In order to keep parity with the nonprofit world they said, “Oh, what we need to do is we have to impose a tax on an expenditure of the nonprofit”. So it's really convoluted thinking and it's led to some weird stuff, which is: Church has a parking lot, its employees are allowed to park there. Church spends money on keeping up the parking lot, Church depreciates the parking lot. Those are considered expenditures, it's got to pay at 21% rate because that's the current ongoing corporate tax rate and a nonprofit pays tax at the corporate tax rate when it has to pay tax, even though it doesn't have to pay tax. But now it's got to pay tax, on an expense.
Jenée: Okay. [laughter]
Prof. Hackney: It makes no sense. It's really convoluted. I think we'll probably see something on this, it's, it's, it's infuriating to many nonprofits and the IRS gave out some guidance. If you put up a sign excluding out certain ones, we won't count your other thing, there are- It's crazy. It's really crazy.
Jenée: So check the tax code and look to see if you need to sign?! [laughter]
Prof. Hackney: It’s really crazy stuff. We'll see. I think we'll see some changes on that one.
Jenée: Okay.
Prof. Hackney: [wind distortion] In the shorter term and other things.
Jenée: [wind distortion] Okay. Are there any other sort of regulations that you expect to possibly see or changes that you see potentially happening for nonprofits from a tax perspective kind of coming down the line?
Prof. Hackney: So, I think one that this audience might be interested in, because it's not just charitable organizations that arts management are likely to be working with, they're likely to also be working with 501(c)4s, and maybe 501(c)6s. So, 501(c)4s are social welfare organizations and (c)6s are business legs and there are plenty of arts organizations that are organized in that way. If you've got a local or state-based arts advocacy organization, it likely has a (c)3 and a (c)4 that are working together. One is going out and lobbying, the other hand is not.
Jenée: Yep, correct, yep.
Prof. Hackney: A major change is underway, and this has been long battled, which is that most nonprofits on their Form 990 have to disclose [wind distortion] the donor names and addresses on the Form 990.
Jenée: Yeah.
Prof. Hackney: This has been long a battle on a campaign finance angle. Many in the campaign finance world that believe that we need better campaign, campaign finance rules, believe it's important to have disclosure of donor. So, you've got certain rules already with that,
Jenée: Right.
Prof. Hackney: But (c)4s and (c)6s don't necessarily have to abide by those rules. IRS by-regulation has just proposed regulations ending the collection of that data, that'll probably go into effect in 90 days [from the date this interview was recorded – September 2019], they've lost a case in court after doing it through a revenue procedure. Court said you've got to do it through notice and comment and so they've enacted a regulation in that collection that will impact your, your listeners.
Jenée: Very much so, because anything that's involving donor names, donor-, uh personal information is going to have long rippling effects, so-
Prof. Hackney: Very much so and it impacts your relationship with your donor.
Jenée: Yes, absolutely. And sort of shifting gears almost entirely here, but still staying on the topic of donors - I know you've also written extensively on cryptocurrency and charitable donations of cryptocurrency and some of the, I think, expectations that sort of went through the nonprofit sector of this potential situation where everyone else has been receiving a windfall. Let's put this for good and I know there are was the very famed case of the Pineapple Express donor who had millions of dollars that he had gotten in cryptocurrency and passed it all out. And so, some of that has started to come into the industry.
Prof. Hackney: Yep.
Jenée: A lot of it has started to come in more through Donor Advised funds.
Prof. Hackney: Yep, that’s right.
Jenée: So I'm curious to see you, kind of what your take on the past couple years of that has been and as charities are trying to figure out what do we do with this, when we either have a cryptocurrency asset that's been donated, or we're starting to get something through a donor advised fund, or maybe we're-, they're going to-, I know a couple of organizations are starting to contemplate actually accepting them within their organization for payment.
Prof. Hackney: Right, yeah, absolutely. So, I guess the thing to start with is obviously a cryptocurrency has value. I don't know how much more volatility there is in it, then say some other assets. My sense has been there's been a greater volatility at the moment.
Jenée: I think lately they have been swinging upwards of 20% in one day, it's been particularly volatile lately.
Prof. Hackney: So, I come at this from cryptocurrencies are generally a grift. [laughter] It's my own bias towards this and it's been consistent since they came out. I, to me, that there's not much great to them. Nevertheless, it's a value that's out there and nonprofits are not going to want to be left out of them all the same.
Jenée: Sure.
Prof. Hackney: I think from a regulatory angle, the largest concern is, “what is the valuation of them when they're given to charity?”
Jenée: Right.
Prof. Hackney: “Who is in control of that thing?” There's the Silicon Valley Foundation and it had reported, I think, assets of around nine to $10 billion dollars a year or two ago and that it had a huge drop in that value, and many people thought it was likely that this was a cryptic currency [inaudible]. The big issue for me there is, what was the value of charity value [inaudible] that thing at the time? I think if you get into that game, you really want to be sure that the thing you're taking in and the value you're giving out is done properly, according to the law. I think there's some potential for difficulty there. In that case, I think the folks that were giving the cryptocurrency might have had some restrictions on those assets. If they're getting an immediate donation for deduction for that, then when there's such restrictions on them, there's lots of problems with that, that I think organizations need to watch out for. All the same, I understand wanting to move into that space because there's major money there and you don't want to leave anything on the table. I think the, the main thing is “caveat emptor”. Be really careful as you move into that space. Get someone involved who actually knows what they're doing before you accept it.
Jenée: Yeah, I think that makes a lot of sense. Great. Well, thank you so much for chatting with us today. I've enjoyed speaking with you and I appreciate the time you've taken to kind of walk our listeners through, sort of what the impact of the kind of tax overhaul has been so far, and what may be coming, and then also just sort of peeking forward at some of the potential tax implications of “tech money”, for lack of a better word. [laughter]
Prof. Hackney: Absolutely, it was a real pleasure. I enjoyed it very much.
Jenée: Thank you so much.
---------------
Thanks for listening to the Arts Management and Technology Lab Podcast Series. You can read more on the intersection between the arts and technology at www.amt-lab.org. Or, you can listen to more interviews and discussions in our Podcast Series on iTunes, Spotify, Google Play or Stitcher. Thank you for joining us.
[Outgoing music]
Transcription for the AMT Lab Podcast Series is support by Otter.ai.