I can’t count the number of times friends and family have asked me what percent of their donation goes towards the cause or programs of a charitable organization. There’s a common argument that the amount of expenses listed in the program column of the Statement of Functional Expenses on the Form 990 is the percent that supports the cause. This column is used to represent the amount of expense that was spent directly for the not-for-profit’s mission. (You can find this by searching for the not-for-profit’s tax return on Guidestar.org and reviewing Page 10 of its 990).
However, I would disagree with that argument. There are several expenses that are not allowed to be considered program expenses on the Form 990 that the entity is required to incur to continue as an organization. For example, a not-for-profit’s audit or accounting expense cannot be considered a program expense, yet these services are required to properly account for the operations of the entity. Although this doesn’t directly support the mission (such as purchasing food for a food bank or supplies for a crisis center), the expense for accounting indirectly supports the organization as a whole and without incurring this expense, they couldn’t continue to operate. In addition, the office supplies used by staff for general expenses, the office space for management, and the salaries of management sometimes do not directly relate to the mission. However, without these supporting services, the entity could not continue with its mission.
There’s a third column of expenses on the Form 990 not-for-profits have to report: fundraising. These expenses relate to the amount spent to hold fundraising events or send out mailings to the public to solicit donations to support their mission. Even though these expenses don’t directly go to the mission of the organization, they directly result in additional funding to be spent for the entity’s mission. After all, without getting their name known, how can they get additional funding?
Charitable not-for-profits have several laws and regulations they must abide by. Many are required to have audits where internal control is reviewed and assessed for deficiencies in proper financial control. They also are governed by a board of independent directors who oversee the operations.
There are so many people and animals that are supported by not-for-profits and it would not be possible without donations from you. It’s important to understand where your money goes but I would recommend looking at the statistics of the number of people served or the number of success stories to assess if you want to support that organization.
I always advise looking at a not-for-profit’s tax return prior to donating to assess where the money is spent. However, don’t overthink the base numbers. If there are amounts or descriptions you’re unsure of, ask your CPA to assess them. Overall, let’s keep supporting charitable organizations. Without our donations, they couldn’t help those in need!
By Samantha E. Mahlen, CPA