Overview
There are many organizations around the world trying to benefit society. But there is a lot to unpack in the word “organization.” The term includes nonprofits, social enterprises, and businesses, like corporations, LLCs, and even informal sole proprietorships. Although each of these can make a difference in the world, it’s common to associate societal benefit with the nonprofit organization.
In the U.S., one type of nonprofit is particularly well-known, the 501(c)(3). This IRS-recognized organization allows donors to claim a tax deduction in return for their donations, up to certain limits. But do donors actually care about the tax deduction and formality of being a 501(c)(3) enough to affect their willingness to donate? This is the focus of the current experiment.
In the U.S., one type of nonprofit is particularly well-known, the 501(c)(3). This IRS-recognized organization allows donors to claim a tax deduction in return for their donations, up to certain limits. But do donors actually care about the tax deduction and formality of being a 501(c)(3) enough to affect their willingness to donate? This is the focus of the current experiment.
The Experiment
We conducted a between-subjects experiment with 400 people on the online platform Amazon Mechanical Turk (MTurk) to test whether people are more likely to donate to a nonprofit when it is a 501(c)(3) than not. Participants were shown a hypothetical email from a friend that mentioned they were starting an education nonprofit and seeking donations. We randomized whether the email noted that the nonprofit is or is not a 501(c)(3) tax-deductible nonprofit, and accordingly whether their donations would be tax-deductible or not (randomly assigned).
Participants were told, “Imagine that you are at home checking your email and you notice the email below from a friend.” Participants were then shown the email below, with randomized conditions in [brackets].
Participants were told, “Imagine that you are at home checking your email and you notice the email below from a friend.” Participants were then shown the email below, with randomized conditions in [brackets].
From: Your Friend
Sent: Monday, May 12, 2020, 7:37 AM
To: [email protected]
Subject: Nonprofit Donations
Hi Everyone,
I am excited to let you know that I’ve officially decided to start an education nonprofit. The mission is to provide training to underprivileged young adults who are seeking to rejoin the workforce or advance their careers.
Please consider donating! [We are a 501(c)(3) nonprofit, so all donations tax deductible. / Although we are not a 501(c)(3) nonprofit, so donations are not tax deductible,] 100% of your donation is used directly for the training services (no overhead costs).
Thank you!
-Your Friend
Sent: Monday, May 12, 2020, 7:37 AM
To: [email protected]
Subject: Nonprofit Donations
Hi Everyone,
I am excited to let you know that I’ve officially decided to start an education nonprofit. The mission is to provide training to underprivileged young adults who are seeking to rejoin the workforce or advance their careers.
Please consider donating! [We are a 501(c)(3) nonprofit, so all donations tax deductible. / Although we are not a 501(c)(3) nonprofit, so donations are not tax deductible,] 100% of your donation is used directly for the training services (no overhead costs).
Thank you!
-Your Friend
Following this email, participants were asked “Would you donate? If so, how much?” Answer options included “No” and “Yes (specify $ amount)” with a textbox under the Yes option.
Results
It looks like the 501(c)(3) tax-deduction may not be as important to donors as some had thought. Although participants in our experiment seemed slightly more likely to donate to the 501(c)(3) nonprofit (avg. = $21.58) than the non-tax-deductible nonprofit (avg. = $15.82), this difference was not significant (p = 0.407). This result was robust even when excluding responses with large donation amounts (e.g., p = 0.610 when excluding 8 donations over $100) and when considering only whether participants donated any amount or not (p = 0.270).
Notably, in the current experiment all of the proceeds directly support the organization’s social change programs regardless of its tax status. It’d be interesting to see if this changes if a portion of the donation supports indirect expenses like overhead or administrative expenses.
Conclusion
If you’re considering starting a nonprofit to do some good for the world, but are worried about the regulatory headache of registering and maintaining 501(c)(3) status, it looks like you may not need to worry too much. The 501(c)(3) designation doesn’t seem to matter much to donors. Of course, you should do your homework to know what rights and responsibilities you’ll have for whichever organization you choose. This is scientific advice, not legal or tax advice.