Patagonia’s recent gift to a nonprofit organization committed to fighting climate change has many other nonprofits questioning how and why this nonprofit was the chosen one.
That’s a lot of donations that you could be missing out on, or worse, that you could be ill-prepared to receive.
Here are a few important takeaways from Patagonia’s $3 billion gift as we approach a new year of business:
Why a 501(c)(4) was chosen
There are a few differences between being a (c)(3) and a (c)(4), but the most important is that although all 501(c)(3)s are exempt from taxes, donations to (c)(3)s are the only ones that are tax-deductible. So why was a 501(c)(4) chosen?
When an exempt organization, like a public charity, private foundation, or 501(c)(4), receives dividends or sells appreciated stock, the exempt organization does not have to pay taxes on what was given.
In this case, Patagonia’s founder Yvon Chouinard donated 98% of Patagonia’s shares to a (c)(4) for this very reason. He completely avoided a $1.2 billion payment in gift tax and as an added bonus, gave a 2% interest with voting rights to a family trust, allowing the family to stay in full control of the business (versus stockholders).
Does this all mean it could be beneficial to have both a 501(c)(3) and a 501(c)(4)? Absolutely.
However, there are important things to keep in mind. For instance, having both designations typically means more complex virtual bookkeeping and nonprofit accounting. To ensure that these corporations are efficiently tracked and managed properly, it’s wise to outsource their management to accountants with nonprofit experience.
If you’d like to learn more about how we help nonprofits with their virtual accounting, head here.
Benefits of being a 501(c)(4)s
The frequency of businesses donating a large portion of their profits to charity has increased in recent years. According to the IRS 2020, corporations are now able to deduct qualified contributions of up to 25% of its taxable income. To qualify, the contribution must be:
- Made in cash
- Made to a qualifying organization
First, is your nonprofit organization on the list of qualifying organizations?
Second, giving to charity is clearly great for tax deductions for corporations, but who’s to say philanthropy can’t additionally benefit the nonprofits on the receiving end of the donations?
While nonprofits do not operate exactly as businesses, they do in fact have competitors the same as businesses do.
If you want our advice on the number one way to stand out in front of your competition and win more donations and advocates, we’d suggest supporting a big cause and announcing the benefits that a corporation can reap by donating. Think: what else is in it for the donors?
Not only will this show more involvement on your behalf in the community, but it will also prove that you are willing to take immediate action on deciding on something that your target market genuinely cares about.
Donating to charity is essentially free publicity for the corporations but imagine what this publicity does for the nonprofit of choice!
A rarely seen charity has not only been given ‘X’ amount in charity dollars but has also been recognized by a large corporation for 1) appearing suitable for a sizable donation and 2) supporting a worthy cause.
You’re strengthening your relationship with your donors and attracting new ones simultaneously. Your name will be seen in more places, more often, and that’s never a bad thing when you’re a charity in need.
What goes around, comes around. The louder your voice in the community becomes, the more your story and your purpose will be heard. Those who believe and support the same causes will be more inclined to reach out to help you.
Where 501(c)(3)s end and 501(c)(4)s begin
If you are a nonprofit and want to promote social welfare for the community, then you could be a 501(c)(4). Here’s where the lines tend to get a bit blurry. While a 501(c)(4) provides a benefit to the public, it is not a charitable benefit.
According to the IRS, 501(c)(3)s are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
So, should you consider becoming a 501(c)(3) or (c)(4)? Or both?
We invite you to talk with one of our virtual accountants, so they can help you decide the best option for your nonprofit.
(C)(4)s are often associated with dark money
Unfortunately, (c)(4)s have an ongoing reputation, unwillingly so, for being associated with dark money. It often happens that charities are looped into political campaigns, sometimes for no other reason than simply being an outlet for tax deductions.
On the other hand, (C)(4)s do not legally have to disclose their donors to the public or even to the IRS. This means it would be just as beneficial for charities to accept these donations, especially large ones, if there are little to no repercussions.
What remains is a mystery as to why companies often choose nonprofits that have little relevance to their business goals or nonprofits who truly haven’t accomplished anything charitable at all.
Looking good from the donor’s point of view
Lastly, if you’re up for navigating the nonprofit accounting and bookkeeping world on your own, we encourage you to take advantage of our tips on becoming a charity that donors will have a tough time saying no to:
- A man with a plan is questioned less. As a current or aspiring 501(c) organization, you should have both a business and marketing plan with clear goals and objectives. This will help your donor decide 1) whether you can manage the finances well and 2) if the donation will be put to a purposeful use.
- Pair those goals and objectives with a strategic financial plan. How will the money be distributed? How do you plan to grow and then reinvest earnings back into your nonprofit for further success? Consider chatting with an experienced virtual accountant to hash out all the minor (and major) details needed to make your nonprofit the most appealing and prepared.
- Show how you plan to incorporate the donor’s ideas. How involved will they be in future decisions, whether in fundraising or recruiting other investors?
- Clearly promote your cause. How is your brand currently seen by the public? Do you have a strong reputation? What can you do to strengthen it?
Your donor wants a fully painted picture with all the intricate details. As a nonprofit we know you are focused on getting your message out to as many people as possible and attracting new donors. That’s why we offer our virtual bookkeeping and nonprofit accounting services. We want you to focus on what you love, while we focus on what we’re good at: helping nonprofits succeed.
Reach out to our team virtually here, or give us a call at 770-892-2087.