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Donors Lose Tax Benefits for Supporting Poorly Performing Charities

—from the Winter 2013 issue of the Charity Rating Guide & Watchdog Report

If a charity can't manage to spend even 30% of its total expenses on program services, should it be allowed to receive tax-deductible donations? Not according to the State of Oregon, which has recently decided to stop subsidizing poorly performing charities by disqualifying the donations the organizations receive from being deducted on donors' state tax returns.

In June 2013, the Oregon Legislative Assembly passed legislation that will revoke tax-exempt status in Oregon for charities spending less than 30% of their total expenses on program services (averaged over the most recent three years). If a charity fails to meet this standard, the attorney general may disqualify it from receiving state tax-deductible contributions from donors. The disqualified charity will be required to include language on their solicitations to Oregon-based donors informing them that their donations will not be deductible on their state income taxes. If the charity fails to disclose its revoked status, it risks incurring fines up to $25,000. The disqualification order is to last at least one year and will remain in effect until the charity is able to demonstrate that it has met the minimum requirements for percent spent on program services.

Though this law has only been enacted in Oregon, its effects will certainly be felt beyond that state's borders. The Oregon Attorney General will publish the names of ineligible organizations on the Internet so that the donating public can easily access the information. Since the law affects charities soliciting (not just based) in Oregon, any national charities wishing to reach donors in Oregon will have to meet the 30% standard or risk being publicly labeled as an extremely inefficient organization.

The Oregon Attorney General's office estimates that fewer than 100 of the 18,000 charities registered in the state will fail to meet the 30% minimum. Indeed, the new legislation is not nearly as tough as CharityWatch's benchmark, which requires spending of 60% on program services in order to be considered for a "satisfactory" or "C range" rating. Also, the state will not be undertaking CharityWatch's rigorous analysis of audits, IRS forms and other information. Instead, it will simply use each charity's self-reported program and total expense numbers directly from its tax form. This may result in some charities using accounting maneuvers, such as allocating more of their solicitation costs to programs, in order to give the appearance of meeting the 30% requirement on their tax forms.

The new law includes numerous clauses that allow charities to claim that extenuating circumstances have forcibly lowered their program spending. For example, if a charity is raising and holding funds for a specific program purpose and has represented such to donors, the Attorney General may decline to disqualify that charity. The law will also not apply to certain organizations, including churches and other religious organizations, that are not required to file tax forms.

Even with its shortcomings, this bill may prove to be effective at targeting the worst offenders in the nonprofit world, and its passage is certainly a step in the right direction. With the very limited federal regulation of charities, it falls mainly to the states to protect the donating public from predatory nonprofits, and thus far the Oregon law is one of the strictest in the U.S. The new rule doesn't just punish those charities that spend too much on fundraising or overhead; by tying financial efficiency to a donor's tax deductions, the bill also rewards those members of the donating public who pay attention to how their dollars are spent.

 
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Last Update: January 31, 2014