By: J Eric Smith
I have spent the majority of my professional career in the nonprofit sector, doing work that I have found intellectually and morally rewarding. All of my nonprofit jobs have involved some mix of communications, marketing, public relations or fundraising work, so I’ve spent a lot of time thinking about the things that we do, and finding ways to explain those things to others, most of whom operate outside of the nonprofit sector. While engaged in such interactive and explanatory work over the years, I’ve been confronted with an interesting collection of misconceptions about the nonprofit sector. Here are five of the most common ones I’ve encountered, along with explanations as to why they’re wrong.
1. “Nonprofits can’t make more money than they spend.” In Business 101, people learn that Profit equals Revenue minus Expense. Therefore, it would seem to a casual viewer that a nonprofit corporation can’t have revenues greater than its expenses, because in that case, the nonprofit would be making a profit, and would no longer be a nonprofit corporation accordingly. This is wrong, though. Bad wrong. Any nonprofit corporation that spent every single penny it earned, as it earned it, would quickly become an ex-nonprofit corporation. The real difference between nonprofit and for-profit corporations is what happens to those surpluses when revenues exceed expenses: in a for-profit corporation, the surpluses are distributed to shareholders as income or dividends; in a nonprofit corporation, the surpluses must (eventually) be applied toward to the nonprofit corporation’s mission. Some amount of running surplus is always required on a year-to-year basis just to meet basic payroll and operating requirements. Some larger surpluses may support organizational mission by being placed in endowments, with interest earnings providing long-term revenue streams. Some surpluses may be designated for specific programmatic needs, and held until such time as the funds must be paid to meet those needs. The tricky part, for any nonprofit, is figuring out how much surplus and reserve is too much surplus and reserve, given the commensurate benefit of funds being spent in real time. If a nonprofit sits on a $1.0 million in liquid assets while providing only $100 worth of services a year, then there’s probably a problem there. But if a nonprofit spends $1.0 million a year while making $1.1 million in the same year, then that shouldn’t be a red flag, in and of itself. In any case, nonprofits must, over the long term, make more than they spend, or they will cease to exist as effective entities. So don’t begrudge nonprofit corporations their positive balance sheet positions and reasonable cash reserves.
2. “Nonprofits should always be grateful for any and all gifts given to them.” Well-meaning community members often organize grassroots fundraisers for nonprofit organizations. Some of these grassroots fundraisers are wonderful, sure, but many of them aren’t. While it may seem great on the surface that a group of concerned and caring friends create an event that collects, say, $250 in a bar one night to give to a certain nonprofit, if that nonprofit supports a community that may be harmed by alcohol consumption, then the association of the nonprofit’s name with the bar event may actually be a negative, rather than a positive. Also, if the event’s organizers expect the nonprofit organization’s marketing department to promote the event, invite the organization’s leadership to the event, and then expect the organization’s development office to prepare and mail donor letters after the event, when you consider the total nonprofit labor, overhead and materials costs supporting the event, the net financial impact of the event is actually very likely to be negative. You should never stage a fundraising event or use a nonprofit’s name to promote an event accordingly without checking with the nonprofit first, and without asking the nonprofit if such an event represents the very best way for you to serve their mission as a volunteer. You should also never seek to provide legitimacy to a dodgy commercial, political or social enterprise by tacking on the name of a nonprofit as an afterthought, or publicly treating a nonprofit as though it should be grateful for whatever you toss in the proverbial begging bowl. If you take the time to put the nonprofit’s needs and requirements first, then everybody will be happier with your contribution when it’s done.
3. “I can take a tax deduction for anything that I donate to a nonprofit.” For straight-up cash gifts, this is generally a good assumption, although once your income rises to a certain level, you may not get 100 cents worth of deductions on the dollars you spend. But that fundraising dinner you went to last night, with the $100 ticket price? You can’t claim a $100 tax deduction, since you received tangible goods and services (food, fun, etc.) by attending, so only some lesser portion of your payment is tax deductible; the nonprofit should tell you how much. And the $100 worth of raffle tickets you bought? Since you didn’t win anything, that’s a donation now, right? Wrong: those tickets were your entry fee into a game of chance, and in the eyes of the government, the chance at the prize is worth the same value as the prize itself, so you can’t claim any portion of that raffle expense as tax deductible. And that time that you took all those clothes to the Salvation Army over the weekend and put them in their collection bin, and you tallied up how much you had spent on them all ($1,000) and took that as a tax deduction? Incorrect and illegal, since the value of an in-kind donation is based on the fair market value of the item donated at the time of donation, not purchase. Also, if your in-kind donation is valued at more than $500, you’re going to need to include an appraisal with your tax filing, and have documentation from the charity that confirms your gift. Or say you donate your car to a charity, and its Blue Book value is $5,000. You can take that amount as a tax deduction, right? Not necessarily: if the charity sells it for $3,000, then that’s all you can claim. The bottom line on all of these examples is that tax deduction rules are more complicated than you might think, and you should always seek guidance from the nonprofits of your choice on how best to support them, while maximizing your own tax benefit as well, and not setting yourself up for penalties associated with incorrect tax filings. Get gift confirmation letters from the nonprofits for your gifts, too, in the tax year that you are claiming them. The burden is on you, not the nonprofits, to prove that you made the gifts when the Internal Revenue Service comes knocking.
4. “I see a specific need not being met in my community, so the best thing for me to do is to establish a new nonprofit corporation to address that need.” Maybe this is correct, sometimes, but not very often, and a nonprofit organization shouldn’t be established as a hobby, especially if it plans to fundraise. You also should never establish a nonprofit corporation to give yourself a job as its Director. That’s just bad form. While there is a wide-spread shortage of funding in the nonprofit sector these days, there is no shortage of nonprofits themselves: the National Center for Charitable Statistics reports that there are nearly 1.6 million nonprofit organizations in existence today (a 66% increase since 1998), while Nonprofit Times noted that the number of 501(c)(3) charities (a subset of the total number of nonprofits) with income levels of over $25,000 broke 1.0 million in 2005. There are, of course, hundreds of thousands of additional small nonprofits that never get to that $25,000 threshold, and are likely having minimal, marginal impacts in their home communities accordingly. The Balkanization of service sectors into restrictively tight missions of a growing number of niche nonprofits ultimately hurts the overall effectiveness of the response within that service sector. If you see a charitable need unfulfilled in your community, your best, first bet is to figure out which existing service provider may have a mission that could allow it to meet the need within its existing, established operational and fundraising infrastructure. Setting up competing, small nonprofit corporations without the ability to actually pay for such provision will generally make it very difficult for any funds raised to have any significant, long-term impact. Again, this is not to discourage people from volunteering their time, talents and treasures, but they’re going to be a lot more useful to a lot more people if you don’t reinvent the wheel by starting a new nonprofit from scratch on a whim.
5. “People work in the nonprofit sector because they can’t cut it in the for-profit sector.” From a strictly monetary standpoint, this might seem to make sense, since salaries in the nonprofit sector are generally lower when compared to comparable positions in the for profit sector, and if people can get paid more for doing the same job in the for-profit sector, then their continued presence in the nonprofit sector must be indicative of their second-tier talents. But this, too, is very wrong, offering a shallow and reductive view of the nonprofit sector that fails to recognize fundamental elements of the charitable experience: altruism, philanthropy, and a desire to serve others. There are obviously myriad reasons why people choose to work in the nonprofit sector, but at bottom line, people who work for nonprofits generally get some intangible, immeasurable benefit from their belief in the rightness of their work and their organizations’ mission, and the value of this benefit in their lives may often be higher to them than the additional monetary value of doing similar work for a less mission-driven organization. They feel that their work has a sense of deeper meaning, beyond simply providing income and dividends to shareholders. Others may simply see their lower-than-for-profit salary levels as essentially contributions back to their employing organizations, increasing funds available for mission. At bottom line, few if any people get Masters Degrees in Social Work (to cite just one sector example) to help them become wealthy. They get such degrees, and enter what are sometimes woefully underfunded employment situations, because they want to make a difference. Some of the most talented individuals that any of us are ever likely to encounter have forged their entire careers and reputations working for and with nonprofits, to the tremendous benefit of their communities and nations. The nonprofit workforce isn’t less effective or less valuable than the for-profit sector is, it’s just driven by a very different set of motivations and inspirations. So don’t pass shallow judgment on those who put something other than money first.
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