Non-profits are allowed to spend money on any reasonable costs directly related to their tax-exempt purpose, including program services, staff salaries, marketing, equipment, and administrative overhead. Funds must primarily further their mission, such as charitable, educational, or religious activities, and cannot personally benefit private individuals.
The IRS prohibits nonprofits from using funds to benefit anyone connected to the organization, like board members, trustees, employees, or their families. This rule exists to make sure nonprofit resources go toward charitable purposes, not someone's personal gain.
Common Uses for Donations
Programs: Organizations often need funding to carry out their mission-oriented programs. This could include running educational programs, providing medical care to underserved populations, or any other initiatives the nonprofit has set forth.
To maintain the 501c3 status, a charitable organization must spend a significant amount of money on program expenses that directly impact its mission. Administrative expenses, while valid, cannot exceed the amount spent on program-related activities. The purpose of the charity is to serve public interests ultimately.
No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
The "33% rule" for nonprofits refers to the IRS Public Support Test, requiring most 501(c)(3) public charities to show that at least one-third (33.3%) of their total financial support comes from the general public or government over a rolling five-year period to maintain their public charity status, preventing reclassification as a private foundation. This support must come from diverse sources, not heavily concentrated in a few large donations, with individual gifts generally limited to 2% of total support.
Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.
What are the most common mistakes nonprofits make? Some of the most common mistakes include unclear missions, weak board engagement, poor donor communication, lack of financial transparency, and neglecting compliance requirements. Many of these issues are fixable with the right tools and support.
The 80/20 rule (Pareto Principle) for nonprofits suggests that roughly 80% of results come from 20% of causes, most commonly meaning 20% of donors provide 80% of donations, but it also applies to programs, volunteers, and marketing efforts, guiding organizations to focus resources on high-impact areas like major donors or effective programs for greater efficiency and fundraising success. It emphasizes donor stewardship, program evaluation, and targeted communications to maximize impact, though some argue for diversifying away from over-reliance on a small donor base.
Other things that charities often need to spend money on include:
Misappropriation of funds: This occurs when an employee or board member uses company funds for personal use, usually by writing checks or stealing cash. Kickbacks: A kickback occurs when a person in a position of power receives money or goods from someone who wants to do business with the nonprofit for personal gain.
Common violations that might get you in this pickle include:
Below are a few different areas where a surplus of nonprofit cash can be applied.
➢ 80/20 Fund-Raising Rule
For funds raised from the public for foreign charitable purposes, the applicant has to apply at least 80% of the net proceeds of the funds raised within Singapore. The 80/20 rule will be waived for private fund-raising appeals or for appeals in aid of providing immediate disaster relief.
If the nonprofit is sued and lacks the proper planning and protection, you could lose your savings, your home and other assets. Nearly two out of three nonprofits reported a Directors & Officers liability claim within the past 10 years.
Here are some of the worst offenders:
Common Mistakes Non-Profits Make
Failing to File Form 990: The IRS automatically revokes tax-exempt status if you miss three years in a row. Mixing Funds: Using nonprofit funds for personal expenses can trigger investigations.
The following transactions are generally considered acts of self-dealing between a private foundation and a disqualified person: Sale, exchange, or leasing of property, Leases (but see Certain Leases, under Exceptions to Self-Dealing)
This briefer focuses on three avenues by which 501(c)(3) nonprofits can lose their tax-exempt status: (1) illegal purpose or activities; (2) activity contrary to fundamental public policy; and (3) support for terrorism.
Speaking of time, it is often asked how much time a chief executive should spend on fundraising. The fundraiser in me says, “as much as it takes.” However, the rule of thumb is about 25% of your time in a typical fundraising year and 50% of your time in a season of a capital campaign.