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Opinion: Nonprofit tax returns don’t tell whole story

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"Do better.” Ouch, my ego was crushed for the moment.

“Do better?” I thought. I just didn’t know what to do as I held the note from the donor, who would not be giving this year.

Why the “do better” from the donor? According to their note, they would only fund organizations with a percentage of management expenses less than 10%.

What does that mean for you? Well, each nonprofit has to file a tax return and in it share three key areas of expenses: management, fundraising and programming.

I want to help educate you on what this donor shared with me. I also want to encourage you to do more than follow percentages on a tax return. I have worked for nonprofit organizations for the last 20 years. I have been the leader of one of these organizations, as CEO, for 10 of those years. During this time, I have learned much about nonprofit reporting. I hope you will gather information to make informed giving decisions as you move into the upcoming year-end giving season.

Let’s dive in. If you strictly look at what is required by the government, it is called a federal form 990. Think of it as a tax return for the nonprofit.

 Let’s have a super simple lesson on form 990s. Your favorite nonprofit has $100 in total expenses. They spend $90 on programming, $5 in management expenses and $5 to help raise funds. The organization’s 990 “scorecard” would be: Program 90%, Management 5% and Fundraising 5%.

Now, let’s look at a few examples of nonprofits I have worked for in the past. One nonprofit serves individuals with disabilities, the second is a national youth service program and the last nonprofit is a youth residential program. The percentages do not tell the story. There are extremes in each of these scenarios.

After some quick analysis, the first organization had a fundraising percentage of 1.35%. Why? The organization runs as a fee-for-service nonprofit. This means each of the participants has to “pay to play” in a sense. This organization needs less outside money, so it has less expense for raising money.

The second nonprofit has the highest management expenses at 23%. Why? Well, this is the national office for a youth services organization. It makes sense that management expenses would be higher for a national organization overseeing smaller branches. These branch operations need the national organization to provide and regulate insurance costs, health care for employees, training curriculum for leaders and supervision.

The last organization had the lowest program expense percentage at 67%. This was surprising to me. So, should we write them off? It depends on what you are passionate about. Do you believe that every kid should have the same opportunities as every other kid? Well, then you may want to give because that’s what they do. The organization has the capacity to support the child’s needs and support the family to keep working toward reunification. The work performed is extremely challenging. They have a significant impact on kids at no cost to the families.

What’s the point? Learn more about every organization you support. Don’t make decisions on your giving based solely on the percentages of expenses on a federal tax return. Go to that organization and see their impact. Get to know the staff, executive director and the board of directors. Take time to understand the organization’s business structure to see what and where the expenses are going. Size does matter. Don’t judge your local nonprofit against a national or global impact organization. It is not apples to apples.

So, what did I do with the “do better” note? I sent an email to the donor who sent it. I invited them to come and see what we do, how we do it and, most importantly, why we do it. I hope they will come and get to know us better.

I know whatever organization you invest in would like for you to do the same.

Jason Hynson is executive director of Springfield Victory Mission Inc. He can be reached at jason@victorymission.com.

Comments

2 comments on this story |
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jackiebarger

Thank you, Jason, for sharing. Your comments certainly strike a nerve with staff and board members who work at small, locally-based nonprofits . . . . . and there are a lot of us! I encourage donors to give first to local nonprofits who are meeting the needs of others right in our back yard and right on our own Main Streets. As Jason says, get to know them and understand them. It will be a lot easier than trying to get a first-hand look at the inner workings of a national nonprofit with tens, or even hundreds of millions of dollars of budget and thousands of employees. It will also be more rewarding, knowing that you are helping your neighbors and friends serve others and make your hometown and local communities stronger.

Monday, November 7, 2022
user8690

Jason, thanks for providing this factual opinion piece. So many folks make decisions based on partial information that can be remarkably misleading. Additionally, the idea that all non-profits can function on a 10% management margin is a falsehood that has been long-perpetuated. It's unrealistic to expect that all non-profits can provide the needed services without the proper management infrastructure.

Tuesday, November 8, 2022
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