Donors Should Make a List and Check it Twice

Andrew Crowell

Year-end can be both a festive and frenetic time. Parties, gift shopping, holiday cards and year-end deadlines all can make merry and bright become hectic and tight. However, rushing to make donations before year-end can result in mistakes and possibly even tax problems.

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So, what can donors do to ensure that their donations actually get directed toward the right charities, consistent with their goals and priorities? Here are some tips:

-- Do the research.

-- Check the numbers.

-- Make a visit.

Do the Research

First, review, but be aware of websites. While the internet makes it easy to find information on just about everything, this information can sometimes be misleading and/or incomplete.

After all, websites are primarily marketing tools.

Websites can make small organizations sound and look much bigger than they actually are. Web pages can also highlight or omit important contextual information which donors could find valuable in evaluating one organization over another.

As such, it is important for donors to exercise caution and use discernment when evaluating all marketing materials. Investing a bit of extra time and research is the best way for donors to ensure that their financial support goes to organizations that align with their goals and values.

Check the Numbers

Another vital step is to review the audited financials of the nonprofit and possibly third-party ratings of the organization's financial strength and fundraising costs, as well as program outcomes and efficiencies.

There are numerous free internet resources to assist in this process such as Charity Navigator, the IRS Tax Exempt Organization Search and the Better Business Bureau Charities & Donors websites.

Donors should also check an organization's 501(c)(3) charity status with the IRS to ensure that it is in good standing with all requirements of a qualified charitable organization, known formally as the Publication 78 Data list.

Donating to an organization which is no longer on the Publication 78 Data list will result in disqualification of the donation as a tax deduction and could even trigger an audit of one's personal tax return.

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Another useful tool, which these same websites offer, is easy access to the organization's Form 990 financial filings with the IRS.

While at first glance these tax report forms may seem overly complex and confusing, in reality, they actually contain helpful supporting information about the organization, its funding sources, its leadership and its programs and accomplishments. The filing can also be helpful for clarifying the organization's mission and how much money it spends on fundraising activities to support the various programs it offers.

Further, the Form 990 can be a useful comparison tool for evaluating charities in an apples-to-apples fashion as each tax-exempt organization must file it annually.

Beyond the financials, the Form 990 also lists the board of directors, senior leadership and staff, program descriptions and accomplishments, etc.

Make a Visit

If the opportunity presents itself, donors should visit and tour the organization as a supplement to the research and financial review. Walking the facilities, meeting staff and posing questions of senior leaders can add important context to the financial data.

If the donor knows someone on the board of directors, they should reach out directly to that contact to gain personal insights from this trusted resource.

Donors should be inquisitive and ask questions to gain a better understanding of the organization, its mission as well as its opportunities and potential challenges. Requesting a copy of the organization's current strategic plan can also provide additional useful insight as to the direction and priorities of the organization.

At first glance, these due diligence recommendations might seem excessive or even Grinch-y. After all, it's a gift to a charity, so why not donate without an inquisition?

The answer is simple: donors should want to support a cause which will make an impact consistent with their goals and intentions.

Taking the extra time to research nonprofits prior to investing in them can ensure that financial support is directed toward organizations which best align with a personal mission and priorities.

Taking thoughtful care with charitable investments and one's philanthropy plan can not only provide potential tax deductions, but also a tangible expression of legacy planning.

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D.A. Davidson & Co. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original article. These opinions are subject to change at any time without notice. Member SIPC.