Play It Safe: Crafting a Contribution PolicyApr 27, 2023
Play It Safe: Crafting a Contribution Policy
Making a donation to a nonprofit is an act of selflessness and generosity. As a nonprofit leader, you’ll want to ensure that your donors feel confident that their gifts will be used as they are intended. But, you also need to protect your nonprofit from a situation in which donors want to give you something that you really don't want to receive.
A contribution policy is a written statement that outlines both the types of donations you will receive and the types of restrictions that you'll be able to accept on a given donation. Today, we’ll cover both of these two important distinctions that are essential elements of you nonprofit's contribution policy.
Potential Donation Types
It goes without saying that cash is always king. Cash is welcome here! (We’ll cover restrictions on cash in a moment.)
But what about non-cash gifts? This is where we need to consider including a few conditions in your contribution policy. The ideal non-cash gift is one in which there’s a really simple way to both determine value and convert to cash. These are the easiest type of non-cash gifts to accept. Examples of these type of non-cash gifts include stocks, mutual funds, and similar types of investments. These assets come with real-time valuations built-in and are easily and quickly converted to cash.
It’s not enough to simply communicate your acceptance of these type of investments though. You’ll also need to address what your nonprofit will do with them upon receipt. Keep in mind, that most nonprofits have a policy of immediately converting non-cash investments like stocks and mutual funds to cash. Or said another way, your nonprofit is not in the business of managing investments. It's probably best not to take the risk of gains and losses when you can easily convert them to cash.
Real Property Donations
Our next category of potential giving is real property. This is a general umbrella of a lot of different things such as the donation of land, a house, or perhaps an art collection. Since there’s a plethora of possibilities when it comes to property donations, it’s not as practical to write a policy that addresses each one of these potential items, unless you receive a certain type fairly often. Instead, I recommend composing a more general policy stating that you’ll have a process for evaluating them.
How to Evaluate Donations
1. Is this an asset that the nonprofit can use?
Here’s your chance to pause and consider whether this donation is even something you want. Does your nonprofit have a use for this gift?
2. Is there a downside to this donation?
Once you’ve determined that you actually want the donation, it’s time to think through any possible strings attached to it. Does the gift come with any immediate or eventual liabilities, risks, or obligations that your nonprofit will assume by accepting it? Common examples include property taxes, maintenance fees, and insurance. At this point, you'll need to weigh the potential upside against these potential downsides. You may have some years of outflows to maintain a particular donation, which is why you should first count the cost and consider the pros and cons of converting it to a program asset vs. converting it to cash. Does the math make sense?
3. How will you determine the value of this donation?
Another element of your evaluation process should be how you will determine fair market value. Not only do you care about value, but the donor will have to determine value for the purpos of a tax deduction. Keep in mind, nonprofits cannot define value to individuals. Each individual should discuss donation value with their tax preparer, but the more significant the donated asset, the more this conversation becomes important because you both need to determine donation value. Sometimes, you may need an independent valuation. Other times, you as the nonprofit may be able to simply make a good guess and the donor can make their own tax prep calculations.
In addition to these donation types, you may also want to include policy language that covers charitable remainder trusts and bequest gifts, in which donations are gifted upon the death of an individual. Depending on what’s contained within these gifts, many of the same considerations may apply. You may want to check out my related articles on vehicle donations and inkind donations.
What donor restrictions will you accept?
Now that we’ve discussed donation types and how to evaluate them, the next thing we need to include in our contribution policy is what restrictions we will accept. This policy is really important because the IRS says that in order for it to be a real tax deductible contribution, the nonprofit has to retain full administrative control, which we also want for two reasons:
- We don't want a situation where a donor’s control of their gift becomes troublesome for us.
- We also want to meet the IRS definition of a “contribution” so that that individual can get their tax credit.
With this in mind, I recommend that you have a board approved policy about the type of restrictions you will receive. (The most ideal way to receive gifts for any nonprofit is, of course, unrestricted.) So how do we evaluate donor restrictions practically? Well, let’s consider, for example, pregnancy resource centers. They typically function best with just a few categories of donor restriction:
- building or capital related gifts: for future construction or current operations of the facility
- medical services: typically a large part of the budget already
By limiting restrictions to broad categories of your overall budget, you can avoid the troublesome situation of gifts being directed to a very narrow part of your operations in which you may end up receiving more for that than what you need to operate it. You don’t ever want to have to sit on money because you’re forced to honor its restriction when you actually need it for something else. So that's why we want to be really clear about what restrictions we can (and can’t) accept.
Let’s apply this to another real-world example. If you operate a benevolence program, a mission-support program, or a tuition assistance program, you may encounter a situation where one individual wants to donate funds to bless another specific individual. In other words, a donor may say, “Here’s my gift, but I want this person to receive it.” Well, from the perspective of the IRS, anytime a donor uses a nonprofit as a pass-through vehicle to give a gift to a specific recipient, the donation can no longer pass the contribution test. If a specific person want to give gifts to another specific person, you should encourage them to do that. But as a nonprofit, you don’t need to be the middle man and take on the burden of that specific restriction. I typically recommend a policy stating how you will handle earmarked gifts. Best practices would say that you only receive gifts in which you have full administrative control over, or maybe more specifically that you'll only consider those earmarks for people as “suggestions” and rather that you can honor a broader restriction to only using it within your benevolence, missions or tuition assistance program. In this case, the funds would be restricted to the program of the donor’s choice, but the question of who receives it will go through the nonprofit’s typical application process.
Once you get this contribution policy all wrapped together, you're going to want to post it on your website. Make sure you communicate it with your donors, and ensure that it’s handy and available when a gift comes in that doesn't seem to fit within this written policy of what's good for your nonprofit. But, if this does happen, I find if you talk to the donor and explain where your need is and why your policy limitations exist, they will typically make the donation adjustment with you. So don't be scared of that conversation, but use it to your advantage as an opportunity to live out these stewardship principles every day.
As I always say, having a nonprofit CFO on your team is incredibly helpful. There's so many unique aspects to this contribution policy conversation. I want to make sure you know I'm available for situations just like this. If you could use my help on this policy, by all means, schedule a consult with me, or visit my blog to subscribe to tips like this in your inbox. I hope you get your contribution policy written and implemented. It will definitely prevent a lot of headaches in the future!
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