Are you telling the truth about your fundraising costs?

This headline in this week’s online Nonprofit Quarterly caught my eye:

New Study Finds non-reporting of fundraising expense widespread

The story went on to say:

“A new study using the most recent IRS data available through GuideStar and performed by the Scripps Howard News Service has found that 15,389 nonprofit groups, or 41 percent [emphasis added] of all United States nonprofits with annual budgets of $1 million or more, represent on their 990s that they spend exactly nothing on fundraising.”

As someone who trolls Form 990s and the nonprofit press fairly frequently, the news that some nonprofits are not reporting fundraising expenses wasn’t a surprise. The number of errors on 990s in general has been reported before.

But 41% of the largest nonprofits! That I didn’t expect.

You should care.

Do you enjoy those tax benefits your nonprofit receives?

The continued privileges of this sector are completely dependent on maintaining public confidence in our ability to deliver a public benefit in an ethical and trustworthy manner and not for private gain.

But more importantly than the tax advantages, if people don’t trust our sector, they’ll simply stop supporting us.  Which would mean the end of a lot of really good stuff in all of our lives.

Unfortunately, public confidence in charitable nonprofits has been on a downward slide since 2006. Reports like this one certainly doesn’t bolster confidence in our sector. Whenever any charity is caught doing something illegal or unethical, it affects all of us. So it takes each of us to be highly vigilant and with a mindset to do the right thing.

We need to educate the public about the important role of fundraising expenses, not hide from them.

Unfortunately, too many in our sector – both organizations and their watchdogs alike — have colluded to create unrealistic public expectations of how much it takes to run nonprofit organizations. We are given high marks for having very low administrative and fundraising expenses – and no marks at all for developing high quality operations, a sustaining funding model and a broad base of community support.

Instead of trying to hide from our real fundraising costs, we need to actively educate our supporters, the media and our publics’ that financial health, strong programming and good management go together, that there are real costs involved and that all of these functions need financial investment.

And yes, while there are a few bad apples out there that may be deliberating raising money simply to fund themselves, they are vastly outnumbered by the thousands of hard working organizations that are unfortunately starving the very fund development efforts that could dramatically improve their bottom line and with it the community improvement they are trying to achieve.

The rules are complex, but you do need to learn them

Calculating fundraising costs is complex, so it’s not surprising that there might be some errors in the amounts calculated. But that unfortunately doesn’t let any of us off the hook for learning the rules and doing our best to calculate the cost of fundraising as accurately as possible.

Just in case you don’t know what’s counted as fundraising in assessing costs, here’s the IRS definition of a fundraising activity in the instructions for completing the 990:

“Activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, other assets or time. They include publicizing and conducting fundraising campaigns, maintaining donor mailing lists, conducting special fundraising events, preparing and distributing fundraising manuals, instructions and other materials, professional fundraising services; and conducting other activities involved with soliciting contributions from individuals, foundations, governments and others. “

If you engage in activities that have dual purposes, like a newsletter that educates supporters and the public but also solicits for contributions and volunteers, special joint cost allocation rules apply, known as SOP 98-2 issued by the American Institute of CPAs.

Work with an accountant knowledgeable about exempt organizations

Unfortunately, the Scripps Howard study didn’t tell us how many of those 990s were prepared by accountants.  But with budgets over $1million, virtually all of them are required to file audits – and accountants prepare those audits.  So shame on the accounting industry as much as shame on our nonprofit colleagues.

Are there ever cases where an organization might legitimately have $0 fundraising expenses?

If an organization didn’t solicit for volunteers and received funding purely from program fees, investments, or the like and didn’t raise any grants, contributions, dues, or special event revenue, then the expenses of bringing in money might be correctly reported as administrative expenses on their 990.

Crazy, huh.