Article: Checking Out Charities


	Gerry Henderson

June 2008

Checking Out Charities

Thanks to the Internet, it’s relatively easy to find out whether a charity meets your criteria for financial support

The sluggish economy is hurting not only many businesses and workers; it is also taking its toll on charitable organizations. In tough economic times, demand for the services that charities provide tends to grow at a higher rate than donations and investment earnings.

You may wish to step into the breach by increasing your charitable giving, and we heartily applaud this sentiment. At the same time, you should be very careful to direct your contributions to organizations that truly need and fully deserve your support.

Thanks in large part to the Internet, it’s much easier than ever to evaluate charities. Spending some time pointing and clicking can lead to more informed decisions about how to best allocate your donations. Here are some easy steps you can take to ensure that your charitable giving makes the greatest impact.

IRS Approval. One of the first things to do when checking out any charity is to make sure it’s an IRS-approved nonprofit (tax-exempt) entity. There are two reasons for doing this: First, contributions to IRS-approved charities are tax deductible; donations to other organizations generally are not. Second, any IRS-approved charity must jump through at least a few hoops of legitimacy to become eligible to collect tax deductible donations from generous folks like you. These organizations are also exempt from owing any federal income tax on income generated from their charitable activities.

Most IRS-approved charities are listed in IRS Publication 78, which is updated frequently.

Of course, IRS-approved status does not guarantee that an organization is a “good” charity that will actually use your contributions wisely and for the intended purpose. Further investigation on your part is required (more on that later).

Web-Based Research. The next step in winnowing down the list of charities is to gather some basic information about their purposes, efficiency of operations, and financial strength. Several websites can help you in this regard.

One of the most popular is Charity Navigator, which evaluates more than 5,000 of the largest charities by measuring their financial strength and by calculating how much of their revenue is expended on the programs and services related to their mission. Each organization is given a numerical score and a star rating. Charity Navigator also gives numerical scores and star ratings for other charities considered to be in the same peer group as the organization you are investigating. Finally, Charity Navigator provides summary financial information, such as total revenues for the fiscal year, total expenditures, expenditures on programs and services, revenues versus expenditures, and net assets as of year-end.

You can identify your own favorite sites by using a search engine to conduct key word searches (“charity ratings,” “charity watchdogs,” “best charities,” etc.).

It’s also important to understand that any charity rating system has inherent limitations. You probably won’t be able to find out anything about local organizations because only the largest charities are covered.

Tax Returns. The charity equivalent to a corporate tax return is IRS Form 990 (Return of Organization Exempt from Income Tax). Since churches, church-related groups, and charities with less than $25,000 in annual revenue are not required to file Form 990, it’s often difficult or impossible to find reliable financial information about such organizations.

A good way to see Form 990 information is at GuideStar, which displays reported financial information for more than 1.7 million charitable organizations.

While you may be amazed at the volume of information, the numbers can be overwhelming. Here’s how to zero in on some of the more important items on a Form 990:

Page 1, Line 18 shows the excess or deficit for the year. For all intents and purposes, this is the charity’s operating profit or loss.
Page 1, Line 21 shows the organization’s net assets (total assets minus total liabilities).
On Page 2 you’ll see Part II, Statement of Functional Expenses. This schedule shows how much was spent on various expense categories for program services (the activities for which the charity exists) and for general and administrative costs.
On Page 4 is Part V, which lists the charity’s officers, directors, trustees, and key employees, along with how much they earned in salary and benefits and how much they collected for expense account allowances.
After Form 990 (which has six pages), you should find Schedule A, which lists the charity’s five highest-paid employees (other than officers, directors, and trustees) along with the five highest-paid independent contractors for professional services.

Form 990 includes plenty of other information, but the highlights (as we see them) are explained above. If you want to dig deeper into an organization’s finances, you now have the means to do so.

Your Decision. There you have it. We hope this information helps you establish your own guidelines for identifying charities that deserve your support. Once you find them, you should monitor their performance to make sure they continue doing a good job. This all takes some time, but it’s time well spent. If you have any questions about this article, about charitable giving in general, or about any other tax or financial planning issues, please don’t hesitate to call your Schmidt Westergard & Company tax professional.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.