The IRS "1/3 rule" (or 33.33% support test) dictates that a 501(c)(3) organization must normally receive at least one-third of its total support from public sources—including donations, grants, and membership fees—to maintain public charity status rather than being classified as a private foundation. It ensures diverse funding, preventing reliance on a few donors.
The "33 rule" for nonprofits usually refers to the IRS Public Support Test, requiring 501(c)(3) public charities to show they receive at least one-third (33 1/3%) of their support from the general public or other public charities over a five-year rolling period, distinguishing them from private foundations by ensuring broad community reliance. This is crucial for maintaining public charity status, involves reporting on Form 990 Schedule A, and can be passed through meeting the 10% "facts and circumstances" test if the main test is missed.
Current ratio = current assets / current liabilities
A current ratio above 1 indicates that your nonprofit has more current assets than liabilities, which is generally considered healthy.
501(c)(3) rules require organizations to be exclusively for charitable, religious, educational, or scientific purposes, prohibiting private benefit, political campaigning, and excessive lobbying, while mandating strict financial transparency, including annual Form 990 filings, to maintain federal tax exemption and allow donor deductions. Key rules involve using all net earnings for the exempt purpose, dedicating all assets to charity, avoiding insider benefits, limiting lobbying, banning political activity, and filing annual reports.
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.
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.
Political activity
All 501(c)(3) organizations are prohibited from participating in any political campaign on behalf of (or in opposition to) any candidate running for public office. The prohibition applies to all campaigns at the federal, state and local levels.
The executive director has to answer to the board, making them the highest authority in the nonprofit, even if they aren't directly on the payroll.
How much should a nonprofit spend on salaries? Typically, nonprofits spend between 15% and 40% of their revenue on salaries, buildings, equipment, utilities, supplies, fundraising, and so on.
The IRS generally requires a minimum of three board members for every nonprofit, but does not dictate board term length. What is important to remember is that board service terms aren't intended to be perpetual, and are typically one to five years. Service terms must be outlined in the nonprofit bylaws.
Email campaigns typically deliver 3:1 to 5:1 ROI because the costs are so low. If you're seeing less than 2:1, it's time to revisit your messaging and targeting. The national average for overall nonprofit fundraising ROI sits around 4:1, meaning most organizations raise $4 for every $1 they spend.
The 50/30/20 rule is a budget guideline that allocates 50% of after-tax income to Needs (housing, groceries, utilities), 30% to Wants (dining out, entertainment, shopping), and 20% to Savings & Debt (emergency fund, retirement, loan payments). While not directly a "charity rule," you can incorporate giving by slightly reducing the 30% "Wants" category to free up funds for donations, making charitable contributions a fixed part of your budget rather than an afterthought.
The IRS "10k rule" primarily refers to the requirement for businesses and financial institutions to report cash transactions over $10,000 by filing Form 8300 (for businesses) or a Currency Transaction Report (CTR) (for banks), under the Bank Secrecy Act. This rule helps combat money laundering, tax evasion, and terrorist financing, requiring reporting for single transactions or related transactions totaling over $10,000 in cash within a year, with penalties for non-compliance.
To avoid the 22% tax bracket (or any higher bracket), focus on reducing your taxable income through strategies like maxing out 401(k)s and HSAs, deferring bonuses, tax-loss harvesting, smart charitable giving, and strategic asset location, understanding that higher rates only apply to income within that bracket, not your entire income.
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.
So how much money can nonprofits keep? The short answer is that there is no limit to the amount of money nonprofits can keep in reserves. As long as it can be proved that funds are being used to advance the nonprofits' mission, then the money can be directed as the nonprofit wishes.
Here are some of the worst offenders:
These include ineffectiveness in execution, poor strategy development, suboptimal behaviour of particular board directors to each other and to management, and poor discipline generally from the chair and the board in response to this.