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Evaluating a Nonprofit

Posted on: November 15th, 2020

This is the season of charitable giving.  As the holiday season approaches along with the end of the tax year, the number of donations and gifts in honor of others will be on the rise.  The limitations and needs of COVID-19 are sure to add to the amount.  This raises the question: what steps should you take in evaluating a nonprofit?  Will they use your gift effectively?  Those are not easy questions to answer.

At MLA, we work with many nonprofits, and several of our team members serve as board members or on leadership teams for some.  

A few things to look for in evaluating a nonprofit:

Legal status:  For a nonprofit to issue a tax-deductible receipt they need to have 501(c)3 status from the IRS.  This should be prominently displayed on their website or material.

Mission: A nonprofit is defined by its mission.  That mission is what should define what they do, and they should be able to give evidence of what they have accomplished.  The mission of the organization should be important to you personally.

Financial Documents: Every 501 c 3 is required to file a 990 form with the IRS.  These statements detail what has been given to the organization, and how it has been used.  Many will make these and other documents available on their website or are available on request.

Norm Perkins, MLA Principal and tax expert, has extensive experience with nonprofits.  “We see a lot of good nonprofits, but some not so good,” he says.  “It’s not always easy to know if they are doing the right thing or not.”  

Some Christian organizations are credentialed by the EFCA, or Evangelical Council for Financial Accountability.  Once completing the accreditation and compliance process, they can display the ECFA seal on their website and materials.

Other organizations will have partnerships with larger organizations such as the United Way.  Or they may have prominent members of the community serve on their Board of Directors.  These also lend credibility to a nonprofit.

“Someone with a reputation has something to lose,” Norm comments. “It’s more likely they will ensure the nonprofit manages its finances well.”  How much you give is up to you, but the size of the gift should reflect the scrutiny you give the organization.

While reviewing an organization’s documents and certifications is a good start, it does not tell the whole story.  Brian Morgan is another MLA Principal with many years of nonprofit experience.  

“You want to look at how much they spend on administration and salaries,” Brian says. “But you have to understand what is involved in accomplishing what they do.”  The more involved the mission, the more costs will be associated with accomplishing it.

Brian has worked with Christian nonprofits and government-funded nonprofits, and the difference is noticeable.  “You need to watch out for attitudes that develop in nonprofits about money,” he says.  “When you can’t connect your income to a specific product or service, it’s easy to be presumptuous about what you have.”

Every nonprofit MLA client is evaluated for its nonprofit accounting practices.  But we also make sure they fit with our Business Redeemed approach.  If you have questions about nonprofits, or about Business Redeemed, contact us.