Innovative tax credits await
A $1,000 charitable donation that costs the donor $500? State officials say that math is correct.
This year, for the first time, Massachusetts is offering a tax credit designed to encourage a specific type of charitable giving, and nonprofit officials are pushing to get the word out before the current tax year ends Dec. 31.
But the details are complicated enough that, with just a week left before the 2014 deadline, about a third of the credits have yet to be claimed.
The Community Investment Tax Credit, part of an economic development law signed by Governor Deval Patrick in 2012, took effect this year. It offers a 50 percent credit to anyone who donates money to a community development corporation, or CDC.
That adds another layer of complexity, since many people are not familiar with CDCs. They are nonprofits that try to improve low- and moderate-income neighborhoods by, for example, providing job training and supporting local businesses. Here’s how the program works: Qualifying CDCs are given allotments of tax credits, which they use to try to entice donors. For a minimum donation of $1,000, donors receive a tax credit equivalent to half their contribution, so a $5,000 gift to the organization would result in a $2,500 credit on their tax return.
It’s a public-private sector collaboration in which government money is used to attract private dollars for nonprofits, and state revenue is expended only if the credits are claimed.
Sweetening the deal, donors can take a federal income tax deduction on their donation, based on their tax bracket.
“There’s definitely a learning curve for both the nonprofits and the donors,” said Joseph Kriesberg, president of the Massachusetts Association of Community Development Corporations, which proposed the program and received legislative support from state Senator Sal DiDomenico and then-state Representative Linda Dorcena Forry, who is now in the Senate. “But as this thing has rolled forward, we have, I think, gotten better at explaining it, and as it sinks in, people are understanding it more.”
Of the more than 50 CDCs in Massachusetts, 38 are participating in this year’s program. The number of tax credits allocated by the state for 2014 totals $3 million — individual CDCs received allocations ranging from $60,000 to $150,000 — and so far about $2 million of those credits have been claimed. The deadline for making donations in return for a 2014 tax credit is Dec. 31.
“Early on, as we explained this to prospective donors, there was a little bit of a too-good-to-be true skepticism, but that has started to turn around in the last few months,” Kriesberg said. “For a new program as unusual as this, I feel like we’ve had a pretty good start.”
Patrick has described the program as “a way of strengthening organizations that make possible the kind of lifting up of neighborhoods and of communities that we need done, and it can never be done through government alone . . . and CDCs are enormously important in that respect.”
And Governor-elect Charlie Baker has said the program is a “great idea” that “makes a ton of sense” and “we should be all over it as a Commonwealth.”
The CDCs can use the donations in a variety of ways to spur economic development. A CDC on Cape Cod, for example, is trying to shore up the fishing industry, while a CDC in Franklin County is operating a food processing center designed to help farmers, caterers, and restaurants. CDCs in Dorchester and Fitchburg are rebuilding housing markets hard-hit by the foreclosure crisis.
The program is “very important, especially for us, because we’re a small CDC,” said Nam Pham, executive director of Viet Aid, which works with the Vietnamese population of Dorchester’s Fields Corner neighborhood to develop affordable housing and offer home buyer education programs, among other projects. “We always have a shortage of support, of funding, and this tax credit has helped us raise more money from new sources that never gave to us before.”
Because CDCs have an incentive to aggressively seek donors to try to make use of all their tax credits, “what I’m hearing from members anecdotally is that this has motivated them to establish new relationships [with potential donors], and it’s getting their board members more involved in fund-raising,” added Kriesberg.
Next year, the amount of tax credits available jumps to $6 million, and the program is slated to expire in 2019. A CDC can receive between $50,000 and $150,000 in tax credits per year for up to three years. To review the math: A CDC must raise $300,000 in contributions to take full advantage of $150,000 in tax credits.
“This is an interesting model around how to encourage more philanthropy and get the public sector and private sector in sync in terms of funneling their investments toward highly important organizations,” Kriesberg said. “There’s a lot of talk now about everybody leveraging everybody else, and how to drive resources to high-performing organizations, and this, I think, is an innovative effort to do that.”