Of Tax Law Changes, Impact Investing and Mission-Aligned for Profits

Posted by Laura Otten, Ph.D., Director on January 25th, 2019 in Thoughts & Commentary

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Not even a full month into the new calendar year, and we’re seeing reports about the impact the 2017 tax bill changes are having on nonprofits.  We’ve got a survey on our website right now.  I’m not willing to call it research because some is questionable, some preliminary and, some really is just guesswork, especially since many nonprofits concede they are still trying to tally what came in by the end of 2018.  Given those caveats, please read on.

  • Inside Philanthropy, culling the thoughts of many, concludes that there was no negative impact, with even reports on many individuals of “healthy” gains, and even some with “record numbers.”
  • Throughout 2018, there were multiple reports on the large increase in newly created DAFs—donor advised funds. Many attributed this increased interest in DAFs to tax law changes.  And while creating DAFs is great for the philanthropists, it is not always great for nonprofits.  But Schwab Charitable, that vies regularly with Fidelity Charitable in naming itself the largest provider of charitable dollars, reported that $2.2 billion in grants was given by its DAFs, a 35% increase over 2017, and spoke of its giving being at “historic levels”.
  • Jon Pratt, executive director of the Minnesota Council of Nonprofits, and lauded by many in the nonprofit sector, reports that Twin City nonprofits did not see a decline in giving in 2018, and muses that the crepe hangers’ predictions may not come true or it may take two years for the impact of 2017’s changes to the tax law to be known.
  • The Lilly Family School of Philanthropy just released its report making predictions on philanthropy in 2019 and 2020, and it is rosy—sort of. They are predicting historically high rates of giving during this time span, with the key impetus of this growth being foundations and estate giving.  And, of course, mega gifts.  Both individual giving that is not of mega gifts and corporate giving, however, are expected to decline.

An important data point missing in all of this discussion, however, is this statement by a CPA:  under the new tax laws, itemizing is “impossible” for more than 80% of taxpayers.

Given that we are talking money, let’s talk about foundations’ support of impact investing:  investing their money in mission-aligned for-profit companies.  Granted foundations can do whatever they want with the 95% of their assets that the Feds don’t require them to spend each year, I still have to push back.

In a recent survey of the 15 largest foundations by The Chronicle of Philanthropy, only four—Ford, Kellogg, Kresge, and MacArthur—were involved in impact investing, using less than 1/10 of 1% of their endowments to do so.  The big foundations, however, aren’t the only folks in the social impact investing pond; there are also many other foundations of the “smaller” variety.  And, I get this, too:  the more people working to solve society’s ills and help those currently suffering from those ills, the more people working to enrich our communities, the better.

But is social investing the best way to move things forward?  I have, over the years, regularly asked my students whether they think B corporations and L3Cs are threats to the future of the nonprofit sector. To this, I now add impact investing.  No matter what the socially-good goal of these for-profits, they also have a goal of making money for themselves and their investors.  Nonprofits, on the other hand, have the goal of making money to improve on their ability to meet the needs of the public.  Should money that has been put into a foundation, achieving all the financial benefits of creating and maintaining a foundation, be used to line the personal pockets of anyone, even if it is only a small part of those charitable dollars?

I recognize that it doesn’t have to be an either/or:  either you fund nonprofits and make program-related investments, or you engage in social impact investing.  But where is the impact the greatest? Would the money be better spent going beyond the 5% mandatory minimum, putting more money into PRIs?  And are foundations engaged in social impact investing undermining the ability of the nonprofit sector to do its job?  Are they facilitating its demise?  And I’m willing to consider that the demise might be a good thing if I were convinced that these companies that foundations think are doing so much good were doing a better job than the high functioning nonprofits are.

But there is an irony here that should not go unspoken.  As we know, nonprofits are not only regularly criticized if they spend too much on administrative costs, such as salaries, they are penalized for it.  And, yet, here we have money going to for-profit companies that have no such restrictions on how much they should spend on overhead.  How can it be okay not to worry about overhead costs with one type of organization in which you invest, and have overhead cost be the death knell for another type of organization?

The opinions expressed in Nonprofit University Blog are those of writer and do not necessarily reflect the opinion of La Salle University or any other institution or individual.