With the holidays behind us and budget planning around the corner, it’s a good time to reexamine the effectiveness of the organization’s revenue sources, including the end of year appeal. Traditionally, the holidays at end-of-year is the time many donors receive solicitations from nonprofit organizations and make a majority of donations. Yet over the last few years, you may have noticed a significant decline in donations and particularly small dollar amounts. What is the cause, and what can you do to bring these donors back?
Standard Deductions Now More Appealing to Most Americans
There are a couple of trends leading to the decline. Starting in 2017, the tax code was overhauled leading to a doubling of the standard deduction and cap on the amount individuals can deduct for state and local taxes. The results were swift. Over 28.5 million Americans who previously itemized their dedications are now taking the standard deduction instead. Since they are not itemizing, they are not getting credit for the donations they made to nonprofit organizations, and without that incentive, many are choosing not to support the critical work charitable organizations provide. This is mostly affecting small to midsize donations, leading to fewer donors overall.
On the eve of the new tax, many donors with capacity wanted to receive one last tax break but didn’t know which charities they wanted to support. To solve this dilemma, they donated large amounts to donor-advised funds (DAF). This way, donors receive the deduction immediately and can take their time identifying the service charity or charities to ultimately support.
The use of DAFs has skyrocketed. Created in the 1930s, DAFs first started to grow in use in the 1990s. By 2016, 8.3% of donations were made to DAFs, leading to a staggering $23 billion reported to be in DAFs. Stated another way, by the end of 2016, Fidelity Charitable Gift Fund, the largest DAF was also the largest charity in the United States.
Fast forward to 2018, when DAFs became the fastest growing form of philanthropy. According to the 2018 DAF report, donors contributed an estimated $37.12 billion from DAFs to charities, or about 12.7 percent of total individual giving.This growth is partially due to the ease and convenience of using DAFs. Many are set up similar to online banking and investment platforms. Additionally, most DAFs have small dollar amount requirements, encouraging their use by donors of all income levels, including many millennials.
Although the use of DAFs is staggering, there are reasons for donors to hesitate before contributing to one. Although DAFs are open in donors’ names, the account funds are owned by the DAF not the donor. The donor suggests the service charity to which they would like the DAF to contribute, but the DAF is not required to follow this request. In the large percentage of cases, the contribution is made and the activity is seamless, but this is not always the case.
The Impact of DAFs on Nonprofits
DAFs create a number of hurdles for nonprofits’ fundraising efforts. First, unlike foundations, donors are not required to direct a certain percentage of the DAF funds towards charitable organizations every year. And since the companies administrating the funds receive fees based on the DAF’s balance, the companies are incentivized to not encourage customers to make donations.
Second is the DAF’s structure. Unlike foundations, individual DAFs are not required to file any tax reports, making it impossible for charities to research donation history. Additionally, some nonprofit staff may think they should list the donor as the DAF instead of listing the donor directing the funds. But this will make it difficult to track the source of the donation and who should be asked in following years. Instead, the only time staff should list the donor as the DAF is when the directing donor is unknown because the donor chose to make the gift anonymously. Development staff should also discuss this with their accounting/finance colleagues to prevent a disconnect between departments.
For all of these reasons, nonprofit organizations’ end-of-year appeals are shrinking. Given these trends, should we just throw away the annual appeal? Not entirely. There are a number of donors for which the end of the year is still an important time. First, foundations are still required to donate a set amount by the end of each year. These include family foundations who often focus their giving activities in the fall, and, for a number of reasons, may still have some funds they are required to give away by the end of the year. Second, wealthier donors may still be itemizing and looking for the tax breaks donations provide. Reduce and target the end of year appeal to reach these important donors.
Rebuilding Revenue Sources
Nonprofit organizations shouldn’t give up on receiving all of the smaller gifts they used to receive. There are activities that can restore these gifts. Organizations can be creative and choose a date or time of year that is more important to the mission or the organization itself. Examples include the date the organization was created; the date, birthday or death of an important or famous client; etc. Many causes, such as domestic violence awareness and prevention, have months that are already connected to the mission. The organization can choose to use these times to reach out to donors. This may lead to less competition for donors’ attention. The hardest part may be to shift development resources and creating a new habit for the donor.
At the same time, soliciting these gifts can take a large amount of the organization’s resources. Weighing the return on investment (ROI) is critical. Start by identifying the person in the organization (volunteer or staff) who is most connected to the donor. Asking these sources to connect and solicit these donors through social media and direct emails often leads to success. For those with a large number of donors, intimate informal events may also lead results. This is a great opportunity for board members who are not as sophisticated in fundraising to get involved.
A large amount of small donations is an important base of support for a healthy nonprofit organization. The gifts have few restrictions, minimal reporting requirements, and increase the strength of the movement. Although your organization may have experienced a drop in these donations over the past few years, now is the time to strategically reach out and rebuild this critical revenue source.
How has the end of year appeal revenue stream changed at the nonprofit you are a part of? Write to me and we may discuss your experiences in our next article.
Gayle L. Nelson, Esq. is an attorney and consultant partnering with nonprofit organizations across the county raising millions of dollars in resources, engaging thousands of individuals, and building awareness on critical issues. She has a twenty-year career advocating for criminal justice reform, expanding legal services, empowering leaders with lived experiences, and coaching organization leadership. Gayle’s diverse clients, from foundations to trade associations and diverse nonprofit organizations appreciate her unique mix of development, marketing, financial, and legal expertise. She is a leader fueling nonprofit sustainable growth. Gayle can be reached at firstname.lastname@example.org.