Sorting Out Nonprofit Pairs
Donors are often confused by nonprofit pairs. These are related charities whose names often look very similar but that are legally separate organizations. Some examples of nonprofit pairs are Greenpeace and Greenpeace Fund; Common Cause and Common Cause Education Fund; Human Rights Campaign and Human Rights Campaign Foundation, just to name a few. Such groups often share employees and other resources - in some cases the same office space and address. Donors are often confused about the differences between related charities and why it matters which charity they donate to.
The types of activities in which a charity engages will often determine how it must be organized under the tax code, its level of transparency and disclosure requirements to the public, and its tax-deductibility status. Some nonprofits may need to form legally separate entities with different tax designations to comply with IRS rules. For example, a 501(c)3 public charity that is typically eligible to receive tax-deductible contributions may form a related 501(c)4 social welfare nonprofit for purposes of conducting lobbying or some political activity. 501(c)3 organizations risk losing their tax-deductible status if they engage in too much lobbying or in any politics. Conversely, a 501(c)4 organization may form a 501(c)3 organization so that future donations it receives to fund, say, a research or education program, would be tax-deductible.
Many times the grades of two related charities may be vastly different based on how they raise and spend donor dollars. 501(c)4 organizations, for example, may trend toward higher overall fundraising ratios since they more frequently incur the cost to obtain first-time donors, and because donations to such groups are not tax-deductible. However, related charities will often conduct financial transactions between them, so donors may want to consider the grades of both organizations before donating to either group. For instance, a highly inefficient charity may incur high fundraising costs, then grant large sums of money to its related group. This can make the charity receiving the funds appear to be operating very efficiently since it looks to be raising significant contributions with little or no fundraising costs. AIP often refers to the combined audited financial statements of related charities and makes adjustments for certain transactions between related groups in order to provide donors with a clearer picture of how efficiently a charity is using its donations. However, the grades of related groups can still vary widely if one group is operating more efficiently than the other even after adjustments for financial transactions between the groups are made.
While some donors may think of the related entities of a charity as being the same group, related organizations are legally separate and donors must therefore write their donation check to a specific charity rather than to a combined pair of related organizations. Nonprofit pairs often have very similar names that differ only in suffix: Foundation, Education Fund, Action League, Trust, etc. While related charities may share resources, they often conduct very different programs that serve different purposes, such as research versus lobbying, within the combined pair's overall mission. Donors should always check a charity's full name to ensure that their donations are being directed to the types of activities they are intending to support. Generally, donations to 501(c)3 public charities are tax-deductible, while donations to 501(c)4 social welfare nonprofits are not. (The latter are indicated in the Guide with "nt" next to their names.) Since there are some exceptions, before giving, donors should check with the charity or the IRS to verify a charity's tax-deductibility status.