Income and the Not-For-Profit Organisations
Are donations an income?
This article is inspired by the views in Bosnia, but I know there are other places where this needs to be said.
I have a BA in Economics from Kingston University, Surrey, UK. For my thesis, I wrote a paper on whether the not-for-profits are truly not for profit. I had a number of case studies, and I proved that fundraising is basically a ‘for profit’ endeavour since organisations try to maximise income at as lower cost as possible. However, is that enough to prove that these organisations are ‘for profit’? The simple answer is: No.
The role of the stakeholders is very different from for-profits to not-for-profits. In fact, in the not-for-profit sector, ‘stakeholders’ can take all kinds of roles depending on the type of organisation – is it a humanitarian organisation, a mutual aid, a foundation etc. We often refer to the stakeholders in the not-for-profit sector as ‘beneficiaries’. But, no matter what kind of stakeholders an organisation has, the ‘profit’ is never shared among them. Bear in mind that benefiting from the profit is not the same as having a share of the profit.
Where does the money come from? All donations were an income at some point, i.e. money that has already been taxed. In this sense, donations are more like a gift than an income, even though most not-for-profits will register their donations as ‘income’. This is misleading. Revenue in the for-profit sector and the not-for-profit sector cannot be more different. Compared to the total income of not-for-profit organisations, a very small percentage of revenue is sourced from using resources or some form of production, or sale of goods and services created using resources. All other revenue is ‘gifted’. If that ‘gifted’ revenue has already been considered an income, can it be considered ‘income’ again? In the for-profit sector, yes. In the not-for-profit sector, no.
For example: Person A has a business and they make money from it. They use that money to buy a product produced by person B. That money makes an income to person B, therefore person A has generated an income for person B, and B will be taxed. If person A donates their money to a not-for-profit, they are not buying anything. They are gifting the money for whatever reason. The not-for-profit has not generated an income, it has created means for its operation.
What is the ‘operation’ or what is the money spent on? Not-for-profits have to show they are of benefit to society and not to an individual. Therefore, the money they get is more like the national budget, or the place where all the money collected through taxes goes, after all, why do we pay taxes if it were not for ‘the collective good’. However, most of the money donated to a not-for-profit will still be spent on goods and services provided by the for-profit sector, therefore they will still generate an income to person A and B and many others who have a for-profit organisation.
In other words, if we consider donations as income and we treat them as income, that money is taxed before it reaches the not-for-profit, it is then taxed as it reaches the not-for-profit, and then again taxed as it leaves the not-for-profit. Compared to the example mentioned earlier in this article, the money given as donations is taxed more. Why? Because we failed to understand the difference between a donation and an income.
To make matters worse, not-for-profits often exist because of government failure; assuming the citizens have the freedom to act, there are many countries where citizens would love to take matters into their own hands, but their government is oppressive and won’t let them, so they’re forced to just suffer. One of the main reasons why we pay taxes is to enable our governments to provide a collective good. Some countries accomplish this better than others, and there is the question of whether or not it is possible to do it to perfection since governments are often ‘too far away’.
Another reason for taxation is a fairer division of income generated from the use of collective resources. For example, if our water is being used in production, i.e. a good that belongs to us all is being used and converted into a profit for a small number of individuals, then those individuals should be taxed, and then our governments should use that money to ‘compensate’ us for the fact that they’ve permitted a small group to use something that belongs to us all. A large number of governments fail at this, particularly if we consider ‘labour force’. But, that’s too big for this article, so let’s get back to the not-for-profits.
Not-for-profits, as mentioned earlier, exist for a collective good – pick up the slack, sort of speak. This is very often recognised by a government, and a not-for-profit might get funding from ‘the budget’ to carry out its objective. Taking this into consideration, taxing donations, even if you think that donations are equal to income, is just plain rude. I mean, what are the governments saying? Do they not support our decision to ‘pick up the slack’? Because they should be grateful. And, in some cases, they are. So what is it with taxing the money that is given to a not-for-profit?
In short, the money given to a not-for-profit is the goodwill of citizens to correct mistakes or fill in gaps left by government failure. It is not an income that uses collective resources, it is an income to put back the collective resources. Taxation systems don’t always make sense. Sometimes taxes are too low, other times they seem too high and unfair. And sometimes they are just odd, like taxing nurses, police officers, firefighters and such who get paid from the budget. Let’s face it, these workers get paid from (say) a jar, and then they put money back into the same jar. What is that about? If we didn’t call it taxes, we’d call it money laundering.
In short, while our taxation systems are complex and unclear, and probably need more thought, treating donations as income is causing more of a collective failure than benefit. It is time we recognise donations for what they really are or we will soon be taxed for our Christmas gifts.
I’ve worked hard to make this article as simple as possible, so here are a few related topics that I have left out but should be considered in relation to this topic.
Related topics:
Income vs profit – compensation for work vs returns on investment
The for-profit sector and its role in the ‘collective benefit/good’
Corruption in the not-for-profit sector and the ideal not-for-profit sector
Designing an environment in which not-for-profits can function more efficiently and effectively through better understanding of the sector as a whole.