Giving the right gift often becomes a high priority at year end, and with charitable contributions, the same holds true. Donations have the potential to simultaneously lower an individual’s tax liability and make a difference toward a cause the individual supports. To make the right gift to a not-for-profit, an individual should consider not only the amount to give but also the characteristics of the charity receiving the gift. Evaluating a not-for-profit, its vulnerability to fraud, its financial position and its rating with third-party watchdogs can help pinpoint whether the charity aligns with your objectives for the contribution.
Watch Out for Fakes
Fake charities frequently make the list of the IRS’s top tax scams. Groups posing as well-known charities may seek contributions to purportedly support a cause, such as aiding the victims of flooding. Before you consider donating to a charity for the first time, you should do some research into whether the charity is legitimate. The IRS has an Exempt Organizations Select Check tool to help. Many states also have similar name checks through their Attorneys General offices.
Individuals should also be wary of funds solicited over the telephone. The caller should not need personally identifiable information, such as Social Security numbers, credit card numbers or bank account information. Even if telephone solicitors are calling on behalf of a legitimate cause, taxpayers may want to pause before contributing. Professional fundraisers can take upwards of 40 percent of the proceeds they collect. If you want to donate to a charity, consider doing so directly.
Get to Know the Organization
If you admire the cause an organization supports, find out some specifics about its programs and services. An organization may say, for example, that it advocates on behalf of individuals with disabilities. The savvy giver understands what that means, whether it’s holding educational events for the community or one-on-one training sessions with individuals. Knowing how your money may be used can give you a better sense of whether you want to contribute. Volunteering or spending time with the not-for-profit will also illustrate whether its work aligns with your giving objectives.
Taxpayers should consider how the not-for-profit measures its ability to carry out its mission. Not-for-profits should have a set of measurements they use to evaluate their programs and services. Be sure to review this information as it might provide more insight into how an organization operates.
Take a Closer Look at the Numbers
How an organization handles its donations and proceeds may also be of interest. A not-for-profit’s IRS Form 990 tax return provides an overview of an organization’s costs and profits, as well as the executive compensation of its top employees. The Form 990 can be retrieved from the organization or from organizations like GuideStar, a 501(c)(3) organization that collects information about registered charities.
The full financial position of a not-for-profit may be difficult to pull from a Form 990. Individuals can take their research a step further and look for an audited financial statement, which provides more in-depth information and context for the numbers reported on the IRS Form 990.
Be judicious when examining particular line items from a not-for-profit’s financial statements or tax return. A charity’s executive compensation or overhead costs should not be the sole determinate in whether to contribute to the organization. Every entity has its unique challenges and considerations. If you have specific questions about what you’re seeing, reach out to the organization for more information.
Use a Third Party
Several groups and organizations use metrics to grade or evaluate charitable organizations. The Better Business Bureau has a nonprofit branch called the BBB Wise Giving Alliance, which holds its charities to 20 standards related to board size, compensation, oversight and conflicts of interest, a charity’s ability to evaluate and report its effectiveness, availability of audit reports and transparency of financial reporting. Give Well, another not-for-profit, aims to evaluate the how organizations fulfill their mission by researching measures of effectiveness. The American Institute of Philanthropy’s CharityWatch rates charities based on financial measurements, including program expenses and fundraising costs.
Third-party evaluators may provide some useful information about a charity’s effectiveness or efficiency, but the rating should only be part of your evaluation process. If you’re concerned about a score you see tied to a charity to which you want to contribute, reach out to the organization to learn more.
Consider Assistance
A contribution is still a monetary investment, and individuals should treat their gifts as such. Financial professionals may be able to provide additional guidance about what to look for in a cause. They could also give you context for the information you may uncover about a particular organization. For more information about how to make the most out of your contribution, please contact your local CBIZ MHM tax professional.
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