I recently read an article at www.abc15.com (Arizona news station) about how more than 250 Arizona nonprofits, who received more than $1 million in a recent Form 990 filing, reported that they did not spend anything on fundraising expenses in raising those funds. In general, you would expect that if an entity generates contribution income, there must have been some expenses incurred in order to generate that income.
I agree that some nonprofit organizations under-report their total fundraising expenses. However, in my experience with the nonprofits whom I work with, I believe that the majority of those organizations are not under-reporting fundraising expenses intentionally. Some may just not have an understanding of the “rules” for allocating expenses properly. Some may rely on a tax preparer who doesn’t have a lot of experience working with tax exempt entities.
There are also other considerations that the ABC news article did not address. For example, many nonprofit organizations rely on government funding where the government pays the nonprofit on a “fee-for-service” basis. This is especially common in the healthcare field. Some of these nonprofits may be reporting this funding as “government grants” in the contribution section of the Form 990. In that situation, these amounts are not actually contributions for which fundraising costs would be incurred to generate that income. Fee-for-service income is usually related directly to the programs of the nonprofit entity. Another consideration is that many smaller not-for-profit organizations rely on volunteers, such as the Board of Directors or committees, to solicit donations. If volunteers are doing all of this work, there may not be any fundraising expenses to report, while there would (hopefully) be contribution income reported on the tax return.
It’s important to remember that there are many, many different types of nonprofit organizations in Arizona and nationwide and when comparing fundraising expenses to contribution income, it’s sometimes difficult to compare apples to apples between different organizations without knowing about other factors that may be important.
By Colette Kamps, CPA