Replace missed donations with pledges

This WSJ article describes the potential fallout to nonprofit organizations from projected changes in tax rates.

If personal income tax rates are going to increase, then, as the article states, it make sense to defer donations until the years when the value of the tax deduction is increased. (To the donor, that return is all free money, so it’s not really appropriate to compare it to an alternative. To the donor.)

Of course, the value to the organization of having funds a year earlier than otherwise is much harder to measure. It’s determined by the weighted-average cost of capital of the organization, the amount of existing resources (e.g., does the organization have an endowment, or does it operate on an annual cash basis only?), and the value of the return on social capital (as we’ve termed it — basically, what’s the bang for the buck achieved by the organization?).

Many people will continue to give in the same amounts as in prior years and not modulate their use of funds to track tax rates (of course, economists might disagree).

One tactic we’ve identified to assist those who both recognize the need for consistent, if not increased, levels of donations and prefer to take advantage of tax incentives at the margin is to make a multi-year pledge to an organization.

The pledge is generally not a deductible event, since the funds have not been actually donated (and the accrual is meaningless for cash-based accounting entities, such as individuals). Nevertheless, a significant amount of pledges can be relied on by many organizations to modulate their own productive and efficient use of resources. For example, a college knowing that a $500,000 pledge will be paid next year might be willing to expend those funds from its endowment this year in anticipation of the future gift.

Will this work everywhere? No, and particularly not when organizations have little resources to re-allocate; causing your favored recipient to go into the market for debt capital to replace your pledged-but-undelivered funds is not likely to be an efficient use of resources or to result in any real return from the delay to take advantage of the increased tax benefit.

Leave a Comment