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Monday, January 9, 2017

Charity Navigator Notices Nonprofit Sector Approval Rating Soars!

At Charity Navigator, we look at the state of the sector overall to help inform our own analysis of individual charities. We recently took a look at the data provided by the IRS regarding the total number of 501(c)(3) applications between 1996 and 2014. The result of this process is the graph you see before you, which shows the number of approved, disapproved, and backlogged applications annually. If you look to the approved chart, you may notice a distinct spike in 2014 of the number of approved applications. While there may well be a variety of reasons for this explosion in nonprofit applications being approved, it is worth noting that it coincides with the release of an EZ application form by the IRS. While the leap is certainly stark, it is harder to tell if this should be seen as positive or negative for the sector. We have asked two of our analysts, Gillian and Zachary, to briefly discuss the potential positives and negatives, respectively.

America currently has over 1.5 million 501(c)3 organizations, each of which had to be approved by the IRS. As you can see from the graphs above, the IRS much more often approves a 501(c)3 application than disapproves it. Without diving into the IRS’s reasoning for approving or disapproving an application, the number of approved applications signals not only a desire by many to do good in the world, but a step towards enacting change. As those working in and supporting the charitable sector know, there is much work still to be done and many gaps yet to be filled. These applications are a depiction of what will become the future of the sector.

On the other hand, this kind of boom in charitable organizations can work to the detriment of the sector. We have spoken on this multiple times through the years, but it bears repeating. While it is truly wonderful that so many people want to do good work, there is always the possibility that the proliferation of new non-profits could undercut the work of established entities. At the end of the day, donor money is, unfortunately, a finite resource. Charitable giving has held steady at 2% of the GDF annually for the last 40 years, while the number of overall charities has substantially grown. Younger organizations tend to have to spend a fair amount of time and resources establishing themselves and building out the infrastructure that they will need to accomplish their mission. This means that, at least for the first few years of an organization’s existence, these newly formed organizations tend to be less programmatically efficient than their established counterparts. Make no mistake, if there is a need that is not being served, then the philanthropic sector can be invaluable in filling that gap, but larger and more established organizations tend to be a safer bet for your contributions.

Whatever your thoughts on the number of 501(c)3 organizations approved each year, we can all agree that knowing your donation is going towards making a difference in the way you have chosen is important. While we are not able to rate all of the over 1.5 million 501(c)3 organizations referred to earlier, the organizations we rate receive approximately 40% of the total amount of contributions to 501(c)3 organizations. At Charity Navigator, we are working to increase and expand the number and type of organizations we rate, and given the number approved by the IRS each year, we will have our hands full doing so for quite some time!

Written by Gillian Eigo and Zachary Weinsteiger

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