Additional Revenue Sources for NonprofitsBy Magdalena M. Czerniawski | March 25, 2020
By definition, nonprofit organizations focus on supporting their mission instead of benefiting shareholders. Many nonprofits are supported by providing services to various individuals for which they receive reimbursement by the government. However, reduced government funding has led nonprofit organizations to look for alternative revenue sources.
In this challenging environment, it is imperative that nonprofit executives think outside the box about how to raise funds from various sources. This does not come naturally to most nonprofit executives, but it can be a big differentiator.
ENGAGED BOARD OF DIRECTORS
Let’s start with the core of the nonprofit—its Board of Directors. An engaged Board is important for a non- profit organization. A high level of engagement from the Board will not only help the nonprofit remain focused on its mission but also facilitate its growth. Attracting good Board members can be a challenge, but nonprofits, like for-profit businesses, need to focus on networking and finding followers. Engaged Board members can provide their time and resources and find other potential donors who can do the same.
How can a nonprofit attract such Board members? A clear mission statement is key. Every employee of a nonprofit should be able to articulate its mission, which should be clear and concise and resonate with others. If the nonprofit’s mission is well defined, then potential Board members will be able to fully support it with a clear understanding. More importantly, they’ll also be able to communicate that mission to others, including potential donors. This will enable them to grow their donor base with people who believe in their mission and trust the organization.
In today’s world, nonprofits are shortsighted if they don’t sufficiently invest in an online presence. What we are hearing from many is that their staff is too busy and they don’t have funds for a dedicated person to handle their digital activities. However, the cost is relatively small compared with the potential impact. A post on social media can show the great things the organization does in real-time and also raise funds more quickly by including a donation link in the post. Although these online donations might not be large, they can add up quickly. A strong online presence can also raise aware- ness of the nonprofit’s mission among potential donors, providing an easy way to broadcast the message and engage more individuals and companies.
Another way to raise additional funds is through cause-related marketing such as AmazonSmile, which donates 0.5% of the purchase price of eligible prod- ucts to charitable organizations. Nonprofit organiza- tions can easily register on Amazon.com to receive AmazonSmile donations. They can also partner with local stores or for-profit businesses that donate part of their proceeds or solicit on the organization’s behalf. Many corporate entities happily engage in various volunteering activities or raise funds for various charities. Nonprofit organizations should consult with their tax advisors to ensure that any contracts for this type of fundraising are structured to avoid generating taxable income.
DONOR ADVISED FUNDS
Another source of additional funds that are growing in popularity is the Donor Advised Fund (DAF). A DAF is a giving vehicle established at a public charity that allows donors to make a charitable contribution, receive an immediate tax deduction and recommend grants from the fund over time. Donors can contribute to the fund as frequently as they like and recommend grants to their favorite charities whenever they like.
This type of fundraising has spiked with the Tax Act Reform of 2017, which increased the standard deduction and provided an incentive for donors to make deductions once every two years in order to save tax dollars. Over the past few years, some donors have chosen to create DAFs instead of private foundations. Nonprofit organizations should also consider them in their solicitation plans. One of the simplest ways to do this is to include language on the organization’s website stating that the organization accepts donations from DAFs.
In addition, unlike private foundations, pledges can be satisfied with monies from DAFs.1 This could be a great option when donors don’t want to spend additional cash but have funds available in their DAFs. Since there are no distribution requirements for the DAF, some of these donors may be accumulating quite a large amount of money, which can benefit nonprofits. Once the donor establishes a relationship with the nonprofit, those gifts will likely continue into the future.
Another great feature is that the donor can remain anonymous. Therefore, the organization won’t be required to disclose the donation to the government agencies on its Schedule B – Schedule of Contributors that is filed with Form 990.
In short, as DAFs are becoming more popular, nonprofit organizations should consider tapping into that pool of funds.
Various fundraising events can also generate discretionary funds for an organization. These events do not necessarily have to be costly galas. Marathon charity runs and birthday fundraising events are becoming more prevalent, especially among the younger generation. Funds are raised through volunteers or friends and followers of charities who host events to benefit the organization. They are more effective if the organization has a good online presence, as described above, and can easily be found and supported.
Most charities try to avoid Unrelated Business Taxable Income (UBTI), i.e., income regularly generated by a tax-exempt entity that is outside of its mission. UBTI prevents or limits tax-exempt entities from engaging in businesses that are unrelated to their primary purposes, but sometimes it is worth accepting some tax liability to create additional income streams for the organization. This decision should be reviewed with tax advisors before commencing such activity.
There are also more traditional sources of additional income, such as renting the nonprofit’s excess space to others or investing excess cash. Although investments are more common, they depend on the charity’s appetite for risk. Some nonprofits prefer only very safe investments, whereas others are willing to accept more risk to generate a little more income. Every charity should feel comfortable with whatever decision they make, without jeopardizing any potential assets. Again, it’s important not to lose sight of the potential tax consequences of these types of income streams.
A healthy combination of the above approaches—or at least a consideration of them—can prove to be financially beneficial for nonprofit organizations in these financially challenging times. Although the organization may not need to raise funds today, it should think about generating donations and attracting Board members and other constituents for tomorrow.
About Magdalena M. Czerniawski
Magdalena M. Czerniawski, CPA, MBA, is a Partner at Marks Paneth LLP and a member of the firm’s Nonprofit, Government & Healthcare Group. With over 15 years of nonprofit industry experience, she provides tax services to a wide array of nonprofits, including charitable organizations, schools, social welfare organizations, professional associations and private foundations. In addition to providing tax planning and advisory services, Ms. Czerniawski specializes in matters related to ASC 740-10 (FIN 48), the reporting... READ MORE +