How Philanthropy Works

Charities and foundations are great ways to give back to society. Yellow Dog Productions / Getty Images

Most of us learned as children that sharing is a good thing. We didn't know we were practicing philanthropy — we just knew that giving to other people or important causes made us feel good. Decades ago, many people tended to give to the organizations that touched their lives, such as churches, hospitals and schools. (Those three are still among the most popular recipients of charitable giving.)

Today, there are more than 600,000 charities and foundations operating in the United States, representing, it seems, every conceivable cause on the planet. Charities are making their presence known through elaborate ad campaigns, websites and high-profile fundraisers. These more organized, more visible efforts are necessary, charities say, because:

Their services are more in demand than ever.
Government funding is declining and, in many cases, disappearing.
The cost of everything continues to spiral upward.

Americans have responded generously — charitable giving in 2005 totaled over $260 billion, according to the American Association of Fundraising Counsel. Who's doing the giving? People like you and me, according to the Association of Fundraising Professionals, which reports that individual gifts represented about 76 percent of the money raised by charities in the United States in 2002. Donors have become more savvy and now require greater accountability from the charities to which they give. In this article, we'll take a close look at how philanthropy works, the various ways in which you can contribute and how you can make sure your donation is going where it should. We'll also discuss tax-deductible gifts and look at volunteerism, another way of giving.

At its core, philanthropy is anything that represents a direct effort to help others — ideally, effort expended without expectations of getting something in return. Many organizations directly benefit people who need help; others, such as conservation nonprofits (see How The Nature Conservancy Works), contribute in ways that indirectly but significantly affect us and our children and our grandchildren. We are free to give our money to charities that assist causes we believe are important.

The size of the gift isn't what characterizes a philanthropist — nationally, an independent survey found that people in the lowest income brackets tend to donate as much or more than their higher-wage counterparts. According to the BBB Wise Giving Alliance, the average American household donates about 2 percent of its annual income. Most charities say that they still rely on these individual gifts for survival.

Checking Out a Charity

Experts assert that a legitimate and efficient charity should be using 50 to 60 cents of each dollar it receives to conduct the actual charitable work and use the remaining funds to pay for administrative, marketing and other operational expenses.

To find out how efficient a charity is, you can start by checking out the organization with the local charity registration office (usually a division of the state attorney general's office) and with your local Better Business Bureau. Keep in mind that licensing does not equal governmental endorsement of the charity.

There are also numerous noncommercial organizations, such as the BBB Wise Giving Alliance or Candid, as well as professional organizations for nonprofit administrators. It's always helpful to read up on what's going on in the world of philanthropy — check out some of the philanthropy journals (such as Philanthropy News Digest) online and in the library.

You can actually check to see the amount of your dollar that goes directly to charitable work on that organization's required annual Form 990 websites for both Philanthropic Research, Inc. and the National Center for Charitable Statistics make available the latest 990 forms for private foundations and public charities.

Charities and foundations are required to complete this form once a year, and this information must be made available to potential donors upon request. (Many forthcoming charities actually post their financial information on their websites.)

The specific information on these forms and in a charity's annual report will give you a good idea of how the charity works, who governs it (most have directors and boards) and where and how it spends money to address its concerns and run its operation. In these reports, you should be able to see the major expense categories, including program services, management/operation and fund raising.

Program service costs - Research grants made to scientists, food sent to feed hungry families or public information brochures aimed at explaining a disease
Management/operational costs - Expenses associated with the day-to-day operation of the charity, including rent, office supplies and salaries of administrative staff
Fundraising costs - Printing and mailing of appeals, advertising and fees paid to professional fund-raisers

Generally, according to BBB Wise Giving Alliance Charitable Standards, at least half of the charity's total income should be spent on programs and at least half of public contributions should be spent on the programs described in advertisements and appeals. No more than 35 percent of the contributions should be spent on fundraising, and no more than half of the charity's total income should go to administrative and fundraising costs. If it seems that a charity's administrative or fundraising costs are too high, there could be extenuating circumstances. For example, it's natural for a new charity to have higher fundraising costs than an established one.

Solicitation

All charities solicit support in various ways, using in-person, phone, internet and direct-mail methods. Any information you receive should clearly identify the charity and state its purpose.

It has become common practice in modern fundraising for charities to share, swap and sell lists of donors. For example, when you give to a charity, your name and address may be exchanged, borrowed or sold to other nonprofits or even to for-profit companies. Charities who do this say that not only do these activities provide additional income, but they also help them to locate new donors and to reach a broader group with mailings about important issues. According to the Better Business Bureau, a major charity mailing may involve up to millions of letters — something that often requires the use of many different mailing lists.

If you don't want your name on these mailing lists, there are a couple of steps you can take. Increasingly, because of the way many people react to unsolicited mail, charities are disclosing their mailing list policies and providing an opportunity on their printed donor cards or internet forms for you to ask that your name not be shared.

If you're already getting more mail solicitations than you want, you can write to the organizations and request that your name be removed from their mailing lists. This may or may not work — keep a copy of the letter, and if you feel you're being harassed (by mail, phone or in person), contact the BBB Wise Giving Alliance for suggestions and assistance.

Making Donations

Obviously, there are still charities, such as the Salvation Army, that are happy to take your cash. However, today there are several ways for you to make your charitable contributions:

Make a donation by check (that way you have a record of your gift for tax purposes). Make the check payable to the charity, not the solicitor. And don't donate anything until you have the charity's exact name, address and phone number. (If you're being solicited in person, insist on seeing identification.) You should also ask the organization's purpose, how it tries to reach its goals (by awarding grants, conducting research, etc.) and how much of your dollar is used for true charitable purposes. Be sure that you know whether your donation is tax-deductible.
Bequeath funds, land, etc. as part of your will. You'll want to discuss this with your attorney as well as with gift or development officers from the organization to which you want to give.
Donate products, such as computers or used cars, and services. This is a growing area: More than $300 million in computer technology, office supplies, clothing, furniture, building materials, emergency supplies and educational materials is given annually by more than 40 percent of the Fortune 500 companies that manufacture or retail products, and by many other corporations. Gifts in Kind International is the world's largest product philanthropy charity, directly donating to the needy as well as creating partnerships between companies and more than 50,000 nonprofits around the world.

What About Giving via the Internet?

Like most businesses and organizations, charities have taken their fundraising to the internet. Experts estimate that there are presently more than 300,000 websites for nonprofits. This makes sense — a website is a relatively inexpensive way to promote a cause, recruit volunteers and raise money.

As internet consumers have already found, fraud is always a concern. Earlier this year, a Better Business Bureau in Austin, Texas, learned about a person who was using the internet to solicit $1 donations (on checks made out to "cash" and sent to a private P.O. box) for tornado victims and was actually pocketing the money. In another case, a group ran misleading ads that claimed that, for $19.95, they could help anyone obtain "free" cash from private charitable foundations. Chain letters are another cause for concern.

Experts suggest that you try to steer clear of these kinds of problems by following these tips:

Many charities' names are similar, so note carefully the one with which you're concerned.
Look up the charity on the Better Business Bureau's Wise Giving Alliance.
If you'd like more detailed information on a charity's finances or programs, e-mail the charity with your request.
Before you decide to contribute online via credit card, make sure that the charity's web server has encryption capability to protect your card from fraudulent access. If you have any concerns, mail a check.

Tax-Deductible Donations

A basic characteristic of a charity or philanthropy is its nonprofit status (many organizations today prefer the term not-for-profit) — eligibility that must be documented by the Internal Revenue Service before an organization can solicit charitable donations or gifts in the United States. Small charities or churches with annual incomes of less than $5,000 do not have to apply for tax exemption. According to the Council of Better Business Bureaus, organizations that solicit contributions and memberships generally fall into one of these tax-exempt categories:

Internal Revenue Code 501(c)(3) This code includes groups whose purposes are charitable, educational, religious, scientific, literary or supporting national or international amateur sports competitions, the prevention of cruelty to children or animals, and testing related to public safety. (All except the last of these are deductible on your federal income taxes.)

But just because an organization has tax-exempt status doesn't mean that your gifts will automatically be tax-deductible. For example, gifts to charities located in foreign countries are not, in most cases, deductible on U.S. federal income tax forms. Whether donations to a charity are tax-deductible is determined by its foundation status. Within these 501(c)(3) organizations, there are three basic designations:

Public charity - A public charity receives a sizable part of its income from the public (broadly, not just from family and friends) or the government. This is defined under IRS codes 509(a)(1) through 509(a)(4).
Private foundation - A private foundation gets most of its income from investments and endowments and uses that money to award grants to other groups. This falls under IRS Code 509(a).
Private operating foundation - A private operating foundation is a private foundation that donates most of its assets directly to the causes it represents, rather than awarding grants to other charities. This falls under IRS Code 4942(j)(3).

Individuals who give to the private charities, private operating foundations and certain private foundations are allowed to deduct donations that represent up to 50 percent of their adjusted gross income if they itemize on their federal tax returns.

If you give to private foundations, generally, you will be able to deduct up to 30 percent of your adjusted gross income. Corporations making contributions to 501(c)(3) organizations are allowed to deduct all contributions up to an amount typically equal to 10 percent of their taxable income. This applies without regard to foundation status.

Internal Revenue Code 501(c)(4) This classification covers organizations that lobby legislative bodies on behalf of specific causes and that work primarily in social welfare activities. This group also includes some volunteer fire departments, civic organizations and local employee associations.

Contributions to 501(c)(4) organizations are not deductible as charitable donations. (Exceptions are volunteer fire departments and similar groups collecting funds to be used for public purposes, and most veterans' organizations as covered under 501(c)(19).) Interestingly, the IRS says that donations to 501(c)(4) groups can be deducted as business expenses.

Internal Revenue Code 501(c)(6) This code covers trade associations and boards, chambers of commerce, real estate boards and business leagues. The IRS says that contributions to these organizations are not deductible as charitable donations on your federal taxes, but they can be deducted as a business expense if they are "ordinary and necessary" to the taxpayer's business.

Other tax-exempt organizations to which you can make tax-deductible gifts include corporations organized under Acts of Congress (Federal Reserve banks, federal credit unions), cooperative hospital associations, and cooperative service organizations of operating educational organizations.

For more information on IRS exemptions, see IRS: Tax Information for Charitable Organizations.

Volunteering

There are some charities that claim they need volunteers every bit as much as they need money to make their efforts successful. So if you don't have much money, give the gift of your time and care by volunteering. (By the way, if you, as a volunteer, have out-of-pocket expenses, including transportation costs, these may be tax-deductible.)

The UPS Foundation published a national survey on volunteerism in 1998. The major finding of the survey was that volunteers are more likely to donate time when they believe that their time will be used effectively. Around 40 percent of the people who responded to the survey said they had stopped volunteering because the charity with which they worked made poor use of their time. Nonprofits say they have made progress in recruiting and managing volunteers but still consider it one of the most significant challenges they face.

You don't have to find an organized charity in order to do something important. You can buy a pizza and take it to a family whose parents are out of work. Or donate a book to your local library, take your newspapers to the recycling bin or read to an elderly friend who lives alone. After all, they say that charity (or philanthropy) begins at home.

For more information on philanthropy and related topics, check out the links that follow.