Some changes in the recent Tax Cuts and Jobs Act—including a massive increase in the standard deduction that will reduce the amount of taxpayers itemizing deductions—have created concern about negative fallout to the nonprofit sector. Without the tax benefit of a charitable contribution deduction for non-itemizers, will donors continue to support charities at the same level? In response, Colorado is proactively considering a new state income tax credit under The Nonprofit Sustainability Act of 2018 that would encourage donations to certain nonprofit endowments and perhaps offset some of that potential loss.
Colorado House Bill 18-1013 would offer a 25 percent Colorado state income tax credit to individuals who donate money to an eligible endowment fund held by a Colorado-based 501(c)(3) charitable organization. The definition for such an endowment is from Section 15-1-1102(2) of Colorado’s Uniform Prudent Management of Institutional Funds Act (UPMIFA), which describes an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis.
This credit presents some opportunities for fundraising and gift planning, but there are some key limitations of which to be aware:
- The term “eligible endowment fund” does not include assets that the institution sets aside at its own initiative and self-restricts as an endowment fund. Rather, the spending restriction must be imposed by a donor pursuant to a written gift instrument (though the term “gift instrument” is very broadly defined). Thus, if an institution creates its own endowment fund, the original donations for that fund may not be eligible for the credit. However, if a donor subsequently contributes to that fund, and there is something in writing evidencing the donor’s intent that the donation be for the endowment, the credit will likely apply.
- An individual is limited to a credit of $5,000 per year. In other words, a donor can donate up to $20,000 per year to eligible endowments, and claim a $5,000 state income tax credit (plus the value of their federal and state income deductions). This could be enough to start a pending endowment, or encourage multiple donor endowments.
- The credit will only be available in 2019, 2020, and 2021, and excess credits don’t carry over. Thus, donors will want to time their donations accordingly—some may want to accelerate their pledges, others may want to defer, and still others may spread their pledge over three years.
- Endowment funds at private foundations, or that meet the definition of donor-advised funds under Section 4966 of the Tax Code, are not eligible endowment funds here.
- There is an overall state-wise limitation of $12 million on the amounts of credits that can be used per year, and the credits are allowed on a first come, first served basis. As such, individuals who claim the credit late in the game may lose out! Charities will need to be on the ball in processing these types of gifts, as will donors in submitting the required documentation to the Department of Revenue.
- The credit only applies to gifts of money. Gifts of appreciated securities won’t qualify.
- The credit won’t apply to a contribution for which the donor claims another Colorado tax credit like the childcare contribution tax credit or the enterprise zone tax credit. In other words, no double dipping.
A possible downside to the legislation is that it could encourage endowment fundraising at the expense of garnering unrestricted dollars for current operations, at a time when the overall competition for donation funds is tightening up. But for charities considering or already raising funds for an endowment, it would certainly offer an additional incentive for donors.
For Colorado private colleges and universities subject to the new investment income excise tax, this credit could also provide an opportunity to offset some of the tax expense imposed by that provision.
The Colorado House Committee on Finance referred the bill unamended to Appropriations on Wednesday, January 31.