The old adage, “One has to spend money to make money,” rings more true for profit-focused businesses than for community benefit organizations, but nonprofit leaders must still dedicate some financial resources toward drumming up support. The ratio between how much is spent on fundraising costs and how much is spent on program services and administration, however, is of great interest both to donors and government agencies like the IRS and the PA Bureau of Charitable Organizations.
Nonprofits are required to disclose these expenses, most notably on the publicly available federal Form 990, but keeping track of and reporting expenses related to fundraising can often be a challenge. To start, there are three different categories under which fundraising expenses must be reported:
- Costs related to fundraising events, raffles, and gaming;
- Amounts paid to professional or third-party fundraisers; and
- General fundraising expenses.
These expenses are reported separately on the Form 990 and are helpful in understanding the costs associated with soliciting donations. Let’s take a closer look at each category.
Events are considered fundraising if they are not regularly carried on, not substantially related to the organization’s tax-exempt purpose and are conducted for the primary purpose of raising funds. Examples include:
- A fundraising dinner
- An annual 5k race
- A golf event
- A charity concert
Expenses related to these events as well as raffles, bingo, and other gaming are reported on Part VIII of the Form 990 as a direct offset of the revenue received at these events.
Reporting these expenses here allows the organization and potential donors to evaluate if the organization’s fundraising effort is effective. If the expense of hosting a dinner outweighs the resulting income and donations, the organization should reevaluate whether the fundraiser is worthwhile.
Amounts paid to professional fundraisers
These expenses are of particular interest to donors and government agencies alike. The IRS requires separate disclosure on the Form 990 in Schedule G for amounts paid to professional fundraisers. In addition, the PA Bureau of Charitable Organizations requires registration for all professional solicitors; approval of contracts to ensure inclusion of statutorily required provisions; and submission of financial reports after the completion of each contract. Professional fundraising councils have the same requirements, minus the requirement to submit financial reports.
General fundraising expenses
The miscellaneous costs associated with ongoing fundraising campaigns can also be part of a nonprofit’s operating budget. It’s important to determine what part, if any, of employee salaries, office expenses, occupancy and other expenses should be allocated to fundraising. These amounts are reported on the Form 990 expense summary in the fundraising column.
Disclosure of fundraising expenses to the IRS and the PA Bureau of Charitable Organizations helps to protect donors and encourage accountability and monitoring on the part of tax-exempt organizations.
Does your nonprofit need help assessing or reporting fundraising expenses? RKL’s Not-for-Profit Industry Group is here to help. Contact your RKL advisor or one of our local offices today to get started.
Contributed by Molly L. Ramos, CPA, Manager in RKL’s Tax Services Group. Molly has more than 12 years experience in tax services, specializing in individual tax, trusts, estates, gifts and not-for-profit organizations.