Non-Profits 101

Non-profit organizations are a big business in the United States with most of the population supporting these organizations through donations, membership dues, time, or purchases.  So, it’s important to understand key issues of non-profits:

First, know non-profits vary in purpose.  Know what a chosen non-profit does.  This can vary from the provision of education or healthcare to the awarding of grants to the giving of food, bibles, shoes, bikes, (or almost any products you can think of) to insurance, lobbying, advertising, legal work, or labor protections and the protection of gun rights). In essence, a non-profit can do virtually anything if serving the public good or having a charitable purpose.  So, know the purpose.

Second, understand the real purpose of a non-profit.  This is incredibly important.  Some non-profits make grants to other non-profits (i.e. United Way) while others spend funds trying to increase a product’s use (i.e. Dairy Management) while still others raise money for another non-profit (ALSAC for St Jude).  There are non-profits that claim to fight disease (i.e. American Diabetes Association, American Heart Association) and others that sell blood and plasma (American Red Cross).  If you understand what the non-profit spends funds on, you will realize that the use of y0ur donations and time can vary greatly. For example, a non-profit that awards grants to other non-profits has two overhead expenses to cover:  the overhead of the non-profit that awards the grant and the overhead of the non-profit that receives the grant.  Donating directly to a non-profit that uses the funds directly to the end user means more of your donation goes to the end user.

Third, not all non-profits are transparent.  Most non-profits are required to file a Form 990 with the IRS annually and should also provide audited financial information to the public. However, non-profits that claim a religious exemption (i.e. churches, temples, Salvation Army, etc) are not required to submit this information to the IRS or disclose this information to the public.  Think twice before supporting these organizations. Demand transparency. If an organization wants public or private support, they should provide transparency.

Fourth, get to know and understand the Form 990 – the tax return most non-profits are required to submit to the IRS annually and make a copy available to the public.  Not all non-profits provide a link on their website to the Form 990 but y0u can get a copy through the IRS website, Pro Publica, Charity Navigator, etc.

The Form 990 can be very lengthy and overwhelming depending on the organization.  There are 12 Parts and 16 Schedules to the Form 990.  Although most Parts apply to an organization, not all Schedules apply to an organization (which is why it is important to know and understand what a non-profit does).  These Parts and Schedules are summarized as follows:

PARTS

• Part I:  Summary
• Part II:  Signature Block
• Part III:  Statement of Program Service Accompplishments
• Part IV:  Checklist of Required Schedules
• Part V:  Statements of Other IRS Filings and Tax Compiance
• Part VI:  Governance, Management, and Disclosure
• Part VII:  Compensation of Officers, Directors, Key Employees, Highest Compensated Employees and Independent Contractors
• Part VIII:  Statement of Revenue
• Part IX:  Statement of Functional Expenses
• Part X:  Balance Sheet
• Part XI:  Reconciliation of Net Assets
• Part XII:  Financial Statements and Reporting

SCHEDULES

• Schedule A:  Public Charity Status and Pubic Support
• Schedule B:  Schedule of Contributors
• Schedule C:  Political Campaign and Lobbying Activities
• Schedule D:  Supplemental Financial Statements
• Schedule E:  Schools
• Schedule F:  Statement of Activities Outside the US
• Schedule G:  Supplemental Information Regarding Fundraising or Gaming Activities
• Schedule H:  Hospitals
• Schedule I:  Grants and Other Assistance to Organizations Gov’ts and Individuals in the US
• Schedule J:  Compensation Information
• Schedule K:  Supplemental Information on Tax Exempt Bonds
• Schedule L:  Transactions with Interested Persons
• Schedule M:  Non-Cash Contributions
• Schedule N:  Liquidation, Termination, Dissolution, or Significant Disposition of Assets
• Schedule O:  Supplemental Information to Form 990
• Schedule R:  Related Organizations and Unrelated Partnerships

Each Part and Schedule provides valuable information but the ones in bold provide a basic overview.  The remainder fills in the blanks, depending on the organization.  For example, if you want to learn more about the Friends of the IDF (Israel Defense Forces), you will also want to look carefully at Schedule F because Friends of the IDF raises funds for the Israel Defense Forces, which is outside the US.   If you want to learn more about the Baycare Health System, one of the largest healthcare providers in Florida, you will also want to look at Schedule H that provides information on hospitals.  And, if you want to learn more about United Way, Schedule I provides information on all grants greater than $5,000 made in the US by the organization.

Fifth, look carefully at Schedule J (Compensation Information) and the supporting information.  Schedule J lists the compensation of the key employees.  In addition, disclosures related to paying for first class or charter travel, travel for companions, discretionary spending accounts, health or social club dues or initiation fees, personal services, gross up payments or tax indemnifications, and housing allowances or payments for business use of a personal residence must be disclosed.

Sixth, look at how much a non-profit spends on advertising.  Many people would be surprised to learn how much money is spent on advertising and promotion (i.e. St Jude, Shriners, ASPCA, AAA).  This information can be found on Part IX. When advertising/promotion expenses are 30-50% or more of spending, you may want to consider whether you want 30-50% or more of your donation to go for advertising/promotion.

Seventh, know if an organization is making personal loans to employees or directors/trustees by reviewing Schedule L.  In addition, Schedule L lists employees related to key employees, directors, and trustees.

Eighth, know the net assets of an organization by looking at Part XI.  Does the organization have $50 billion in net assets (meaning they probably don’t spend as much as they receive annually and that they have probably invested these funds to grow) or does the organization have just a few million or less?  Think of net assets as a savings account.

In closing, many people associate the words “non-profit” with not making money.  But, this is not the case.  The words “non-profit” simply refer to a tax status whereby the organization does not have to pay taxes on earnings (most non-profits do make money).  Instead, earnings stay in the organization to be used at a later date or to be invested. Non-profits can accumulate billions of dollars and many do (especially educational institutions and healthcare providers).