Charitable Giving is a Form of Investment
Free Book Preview Tax and Legal Playbook
You’re not alone. As a nation, Americans donates more to charity than almost any other county in the world. Individuals, foundations and businesses gave an estimated $358.38 billion to charity in 2014, according to the Giving USA Foundation.
But in recent years a number of fraudulent charities have come to light. Last year, the FTC announced that four cancer charities: Cancer Fund of America, Cancer Support Services, Children’s Cancer Fund of America and The Breast Cancer Society were allegedly using most of the funds that they raised to support the organizers’ friends and family -- not cancer patients, with donations spent on items like cars, cruises and concert tickets.
Cases like these highlight the importance of conducting due diligence before pledging your hard earned cash to a group that you may only have a passing knowledge of. Not all charities are created equal. Some are little more than scams and others -- while legitimate, may not be handling their funds as wisely as they could be. In other cases, causes with official-sounding names may pose as a charity, when in reality; they’re a fundraiser that could be skimming a significant portion of the funds for themselves before turning the rest over to the charity.
“Charitable giving is a form of investment, and people need to perform due diligence on the groups they give to,” says Ben Pierce, former president of Vanguard Charitable, a U.S. nonprofit organization that makes donations on behalf of individual account holders.
When it comes to donating, you’ll want to make your contributions count, to ensure your funds go as far as possible. Fortunately, there are plenty of ways that you can screen charities today. Most nonprofits must typically disclose their finance and governance information -- much of which is free and available online.
Just as you analyze your investments carefully, you should also screen potential charities, to ensure that your donation will earn the best “return on investment,” so to speak. If you’re thinking about making a donation, here’s how you can choose a reputable charity.
Third party evaluations.
A good place to start is by checking third-party evaluations on reputable websites such as CharityNavigator.org and The National Center for Charitable Statistics. These sites examine charities’ finances, their governance, their effectiveness and allow you to check a charity’s name to ensure that the group is legitimate. You can also grab the Charity Navigator app, for easy on-the-go reference checks. The majority of charities listed on Charity Navigator spend at least 75 percent of their expenses directly on their programs. Be wary of organizations that spend more than 25 percent.
Examine their tax return.
If you want to do a bit more research, you can also take a look at your prospective charity’s tax return. Most charities are legally required to file a Form 990 tax form every year, and many make their form available to the public online. You can find these tax forms on GuideStar -- a Washington-based research group that has a database with information on more than 1.5 million nonprofits. A charity’s tax form will contain a wealth of information including the organization’s program expenses, fundraising, assets, as well as executive compensation. Here are a few things that you can check for when evaluating a nonprofit’s tax return.
Their mission statement. Chuck McLean, vice president of research at GuideStar, advises donors to pay close attention to the organization’s mission statement. A sloppy or vague statement indicates that a group isn’t taking its reporting seriously. “Helping veterans,” for instance, isn’t clear enough. The best charities will be more specific. Look a clear outline that shows how, exactly, the group intends to reach their goals.
Related-party transactions. Another area of interest is related-party transactions; where the non-profit discloses financial transactions between members of the group or family members. “If a group checks ‘yes’ to these boxes, I want to know more,” says McLean.
The balance sheet. When surveying the balance sheet, it’s also important to consider whether the organization is doing a decent job managing funds and assets. Look for red flags, such as shrinking assets, but liabilities that rise or stay the same. “Anomalies occur, but groups can’t survive if they keep spending more than they take in,” McLean says.
Don’t feel pressured into giving.
We all know how irritating it can be getting unsolicited phone calls during dinner. It turns out that your frustrations may be well-founded. The cancer charities that were charged with fraud by the FTC used telemarketing calls, as well as direct mail and websites in their attempts to garner donations. Never feel pressured into giving money to unsolicited requests. The FTC cautions that you shouldn’t rush to say yes. Instead, consider declining any requests to give over the phone.
Make it personal.
Instead of feeling pressured into donations, scout out charities that you want to donate to. One of the best ways to find a charity is by choosing one that you have a personal connection to. This will give you a good idea about the type of work that this charity does and allow you to get involved with its work. Don’t know where to start? Head over to Philanthropedia -- a division of GuideStar, and browse through charities by category. This is a fast and simple way to find organizations involved in causes that are of interest to you.
Consider a third party analysis.
Finally, if you’re thinking of donating a significant sum, you may want to consider paying to have an objective analysis on your prospective charity, using a consulting firm that evaluates nonprofits. This will give you peace of mind and allow you to feel confident that your money will be put to good use.
In the end, don’t let a few less-than-reputable groups put you off. There are plenty of well-deserving charities out there that are doing a world of good for national causes as well as overseas work. The key is taking the time to find them. By using the above tips, you’ll be able to scout out potential charities and find legitimate groups that are working in causes that you’re interested in supporting.
In the end, your decision should be made on personal preferences, as well as hard cold facts. Do your research, and don’t waste your time with the telemarketers. Donate with confidence and count on your money making a difference, rather than being just a handout.