There was recently a piece on The Conversation which, contrary to my expectation, said that tax deductibility rules allow charities to throw high priced galas and still maintain a low fundraising expense ratio.
The costs of a fundraising event attributable to things donors enjoy, including food, drink and auctioned items, don’t have to be recorded as fundraising expenses. Instead they can, in accounting jargon, be “netted” against donations.
In other words, if a donor pays $1,000 to attend a gala but gets a swag bag of goodies that cost the charity $900, the event reflects a (net) donation of $100. It does not have to treat the $900 spent on the bag as a fundraising cost. That approach, in turn, helps keep the costs associated with throwing fancy galas under the radar of ratings agencies, since many of the costs are not considered fundraising expenses but instead are buried in the details.
And this routine accounting practice means that charities with incentives to be frugal are generally free to break the bank for special occasions.
Here’s the bottom line: While galas don’t automatically signal wasteful spending, you can’t count on the authorities or other experts to call it out when they do.
I had never really thought about the fundraising overhead ratio in this light before. On top of that, if some of the items in the swag bag was donated, the charity makes more money, thereby lowering the ratio even further. The donor still can only claim a $100 deduction because the fair market value of the contents are still $900.
While I opened this post using the term “deductibility rules allow,” the article authors characterize the rules as incentivizing large gala fundraisers. So when the conversation comes up questioning why people hold these fundraisers when they rarely make money, it might be worth acknowledging that the way the accounting is handled allows non-profits to throw a big party and not suffer under the disapproving gaze of watchdog reporting.
The article also acknowledges that many charities are foregoing large charity events in favor of No-Go Galas where you donate the amount you would have spent getting dressed up and attending. In this way there is even less of a cost to the charity. Basically it is asking for a donation with added context to encourage you to give more than you might to an annual appeal