Proposed Tax Credit Could Boost Endowment Donations

Donors interested in supporting long-term charitable goals and mission here in Colorado could get a boost, in the form of a tax credit. Earlier this year, Representative Dominick Moreno (D- Commerce City) and Senator Chris Holbert (R-Parker) introduced House Bill 16-1089, which provides for a 25 percent tax credit for certain charitable donations to an eligible endowment fund.

Eligible endowment funds are endowment funds held by Colorado 501(c)(3) organizations (other than private foundations) that are managed in accordance with the Uniform Prudent Management of Institutional Funds Act. However, eligible endowment funds do not include donor-advised funds (as defined by Section 4966(d)(2)(A) of the Internal Revenue Code). The proposed credit would be available up to a maximum of $25,000 a year (for a $100,000 donation) and is not refundable. The credit may be carried forward and used by the donor for up to five years as well. However, the credit is not available if the donor claims other state tax credits for the same donation—so no “double-dipping” by donors would be allowed.

Five other states including Iowa, Kentucky, Maryland, Montana and North Dakota currently offer a tax credit for charitable donations to endowment funds. The tax credit “Endow Iowa” reported that in 2014, $6 million dollars in tax credits leveraged $24 million in giving to community foundations. According to the Colorado Nonprofit Association, the credit introduced donors to the option of giving to an endowment that will see their contribution grow over time as a long-term gift, as opposed to contributing a fixed amount for immediate expenditure by a nonprofit. For some donors, supporting the long-term goals of the endowment holds special appeal. Long-term giving also benefits nonprofits by allowing them to plan not just for sustaining their current activities, but also for growth over time. Further, the Colorado Nonprofit Association states that the tax credit helps nonprofits to benefit from the estimated $59 million in projected generational wealth transfer by retiring baby boomers by encouraging them to make lifetime and estate gifts. Endow Montana claims that its tax credit for donations to charitable endowment funds is responsible for a significant boost in charitable giving, totaling $121 million since enactment in 1997.

Opponents of the bill note that it disproportionately will benefit the richest Coloradans. Ali Mickelson, Director of Legislative and Tax Policy for the Colorado Fiscal Institute, urged the House Finance Committee to vote against the bill, arguing that it will increase regressivity and inequality in the state tax code. Michigan, the first state to enact a tax credit for charitable donations to endowment funds in 1988, recently repealed its tax credit in 2012. The Michigan repeal was ostensibly a cost-saving measure in which the state of Michigan repealed two other tax credits as well. However, the fact that the benefits of the tax credit went to the wealthiest citizens was certainly a consideration. For a study and analysis of the effects of charitable donation to endowment fund state tax credits and the Michigan repeal, click here.

For up to date tracking on the bill’s progress, click here.

For additional general information and analysis on the bill, click here.

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