Nonprofits Need to Understand Donation Incentives


FORT KNOX, Kentucky — Most nonprofits predominantly rely on charitable giving. At a fundamental level, nonprofits operate like any other business – they need revenue to fund activity. And like for-profit businesses, nonprofits must market and advertise to their customers, the donors. To create donation incentives, nonprofits must understand the reasons why people donate or would donate to their cause.

Two of this year’s Nobel Prize-winning economists Oliver Hart and Bengt Holmstrom studied and analyzed “contract theory”. The theory posits that humans negotiate “obstacles to human cooperation” based on “different interests.” In other words, people need incentives to act.

The Guardian examined scientific reasons, or personal incentives, why people donate to charity based on a study from the University of Bristol’s Centre for Market and Public Organisation. The examination classified three categories of donation incentives: the purely altruistic, the impurely altruistic and the not-at-all altruistic.

Ultimately, reasons why people donate vary along a selfless-to-selfish spectrum, but nonprofits must viscerally connect donors to their cause to engender financial contributions.

Donor Richard Livingston, a Colorado native, defines the two main methods of charitable giving: outright gift and the bequest. These make up the bulk of donations, while the remainder mostly consists of complex family foundations and life income gifts.

The complexity of organizing, declaring and calculating deductions from the outright gifts leaves many somewhat befuddled come tax season. But the IRS makes declaring outright gifting simple, right?

“Contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income computed without regard to net operating loss carrybacks.” And there are certain organizations that use deductibility status codes to specified exempt organizations. Unless the filer is an accountant or is experienced itemizing taxes, much of the tax code may be difficult to interpret.

If tax breaks were among the most common donation incentives the individual unfamiliar with benefits would have to read through nearly 50 pages of IRS publications, properly itemize and identify the right deductibility status codes. Most casual donors motivated by tax breaks seem better off hiring a CPA or tax professional to prepare tax returns.

By nature, donating to a nonprofit is not necessarily a financial investment. As the donor Richard Livingston aptly stated, “it costs money to give money.” It’s more plausible that people are incentivized by non-fiscal returns, like spiritual or emotional earnings. Popularity, guilt, generosity and obligation all are reasons why people donate.

Other than the outright gift, the bequest is a simple way to meet final wish incentives. “You can’t take it with you,” so many would rather their monetary possessions go to a worthy cause, or limit inheritance to progeny. Whatever donation incentives a person may have with a bequest, a basic incentive is still the underlying motivation to give.

Nonprofits need to know how to make the ask. The Bristol University study found that in the process of will-making, a lawyer merely asking persons to leave a bequest to charity resulted in double the donations.

Forming a connection is vital. Applied Psychology published a study in October 2013 highlighting the correlation between educated donors and monies given. In the article “Familiarity Breeds Compassion,” researchers found that “the more potential donors know about the victims and their environment, the more are they able to identify.” In other words, greater empathy equals greater giving.

True reasons why people donate to nonprofits may remain ambiguous, but nonprofits will see donations so long as they understand how to create a market that matches donation incentives.

Tim Devine

Photo: Flickr


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