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Working with Charities and Hosting Fundraising Events

By Jean Knaack, Executive Director (first appeared in Inside Track - 2009)

“Just 1% of Seattle Marathon Money Goes to Charity” read the November 2007 headline in the Seattle Times. With a headline like that, it was sure to raise local eyebrows and it spurred a few discussion posts on the Road Race Management race directors’ forum at the time.  The article went on to outline financial details about the event including the fact that the marathon, which is organized as a nonprofit event, donated more than $12,000 to their designated charity that year, which equaled 1% of their gross receipts.  The article states, “When runners register for the race, there is a separate section for making donations [to the charity partner]. The marathon has raised money for charity this way in previous years, as well.”  The concern raised throughout a series of articles on the marathon was whether or not runners and charity partners realized that only a small portion of the gross profits would go towards the local charity that the race was promoting as a charity partner.

My initial reaction to the Seattle Marathon article was there was no story, because there is no law or tax code that I am aware of requiring a portion of road race registration fees to be given to other local charities.  This is an expectation that has developed as the industry has embraced the charity aspect of the sport.  At the core, the purpose of a race is to be a race and to promote physical fitness within the race’s home community.  It is an added benefit that the sport has grown into an amazing fundraising and marketing network for charities.  But donating a portion of race registration fees to a local charity it is not required by tax laws.  A nonprofit event organization or a nonprofit club hosting an event can simply keep the proceeds of a race as net assets to help with next year’s race or to invest in their own running programs, such as a beginners program or local youth running program. However, it is important for events partnered with charities to be transparent in their fundraising and marketing messages to participants, the main concern raised in the article about the Seattle Marathon.  In the article about the Seattle Marathon, the board president for the marathon did point out that a portion of their net proceeds are retained to cover race operations for the coming year, a responsible practice for any race.

So what is a nonprofit event?

The designation of a race as a nonprofit has nothing to do with the contributions made to local charities by the race. The nonprofit designation of a race or a nonprofit club-managed event is determined by the business organization of that entity.  A volunteer board of directors that does not profit personally from the event and that oversees the operations of the event is what defines the event as a nonprofit organization along with the official designation from the IRS as a 501(c)3 organization (or through the RRCA-group exemption with the IRS).

There is not a one-size-fits-all approach to managing an event. If an organization is a nonprofit, they are certainly entitled to retain net profits, compensate staff, or hire contractors as needed to run their nonprofit business or event.  In the case of the Seattle Marathon, they have a volunteer governing board of directors with a paid race director, similar to many other large events around the country.  A race director may get paid for their services if a board of directors chooses this method of race management so long as the race director or their immediate family is not a voting member of the board of directors, thus profiting from their relationship with the board.

A race may choose to depend on the generosity of volunteers to make their business model work. Nonprofit management structures differ from event to event and utilize a mix of paid staff, contractors, and volunteers.  However, all nonprofit events share a commonality: they have an independent, volunteer board of directors that does not profit personally from the event.

RRCA members, especially members taking advantage of the nonprofit status through the RRCA group exemption with the IRS, must work to ensure they are operating within the RRCA Guidelines for Nonprofit Board of Directors (see Spring 2009 Inside Track posted online at www.rrca.org/resources/publications), and that they are following our guidelines on adopting a conflict of interest policy, adopting the required policies under the Sarbanes-Oxley Act for nonprofit organizations, and following state and federal regulations for nonprofit organizations.  Nonprofit clubs and events can find copies of the RRCA Conflict of Interest policy along with the Sarbanes-Oxley required Whistle Blower and Document Retention and Destruction policies on our website at www.rrca.org/resources/management.  These items can be used as templates for policies to adopt for your club or event.

All nonprofit organizations, even those receiving their status through the RRCA, should review their state requirements for filing as a charity in the state, especially if you are collecting contributions.  Also, review the state requirements for conducting an independent audit.  Many states require copies of audited statements be filed with the appropriate state entity for organizations with gross revenues over a certain level.  Any nonprofit organization that receives money from a local, state or federal government entity should conduct an annual independent audit and make that audit available upon requests, as required by the IRS (www.IRS.gov).

Raising money for charities

As the running event community continues to grow, so will the local scrutiny of your event management practices.  You and/or your board should ensure you are honestly promoting your relationships with charity partners. Have a clear understanding of the expectations with your charity partner(s).  Some events find they get better treatment and support during the permitting process if they are partnered with a local charity.  For some charities, partnering with a race is more about publicity than fundraising.  For others, they may be depending on your event donations to fund operations.  If the event is a first time event, clearly outline to your charity partner that first year events may simply break even so it should be viewed as a publicity event as opposed to a fundraising event.  If the event is a fundraising event for a charity, be clear in your communications to participants how money will be collected and distributed to local charities.

For example, if the event website or registration materials say all net proceeds go XYZ local charity, then 100% of your net proceeds should go to that charity after all expenses are paid.  Expenses may include an allocation to a reserve fund for next year’s race.  You may elect to say a certain percentage of the net proceeds will go to a local charity.  Be careful with this approach as your good intentions may fall flat if your event does not have any net profits to donate to your charity partner after all accounts are settled.

You may decide that 100% of your registration fees cover the costs of putting on your event and provide for an optional donation to a local charity as part of the registration form.  If this is the case, be sure this is clear in your marketing materials.

If you decide to serve as a fiscal agent for a local charity, (directly collecting donations to be passed through to the charity) you will need to develop a procedure for transparent collecting and handling of these funds.  The RRCA recommends, instead of serving as a fiscal agent, that you encourage people to give directly to the local charity by providing a link for online giving or instruct participants to mail checks directly to the charity.

If donations for a charity partner are given to or collected by the event but earmarked for the charity partner, then at a minimum, you should create a separate account code in your accounting system for these contributions.  These funds collected on behalf of a charity partner by the event should never be used to cover operating expenses for the event.  Ensure 100% of the funds collected for the charity partner are donated directly to the charity partner.  If you are collecting the contributions, your organization is responsible for acknowledging the contributions within the IRS guidelines (http://www.irs.gov/taxtopics/tc506.html).  All donors giving $250 and over must receive a “thank you” letter from your organization if you are serving as a fiscal agent for your charity partner.

The “For-Profit” Difference

Jeff Darman, race director of the ACLI Capital Challenge (RRCA Event Member), points out that they have a unique model they follow for their charity partner. “The entry fee check is made out to the DC Special – Olympics, mailed to our office for race registration information, and we forward all of the checks to DC Special Olympics as part of our donation,” explained Darman.  “That way when we say all entry proceeds go to charity, it is true.  My company, which is a ‘for-profit’ entity, covers all of the race expenses from sponsor dollars.”

If donation checks or online contributions for a charity partner are written to the event but earmarked for the charity partner, at a minimum, you should create a separate account code in your accounting system for these contributions.  These funds collected on behalf of a charity partner by the event should never be used to cover operating expenses for the event.  Ensure 100% of the funds collected for the charity partner are donated directly to the charity partner.  If you are collecting the contributions, your organization is responsible for acknowledging the contributions within the IRS guidelines (http://www.irs.gov/taxtopics/tc506.html).  All donors giving $250 and over must receive a “thank you” letter from your organization if you are serving as a fiscal agent for your charity partner.

Often times calls are received at the National Office where an individual wants to put on a race and donate all of the proceeds to charity; so they say they are a nonprofit.  But this is not what defines them as a nonprofit.  These events usually are for-profit/sole-proprietor events, and their gross receipts may be subject to income tax regardless if they donate all net proceeds to charity.  If you are a for-profit race director, you should not include a contribution line for a local charity on your registration form with the contributions going directly to your for-profit race company.  If “contributions” are paid to the race company, these “contributions” are not tax deductible by the donor and may be taxable income for the race director.  Only a correctly organized nonprofit organization can accept tax-deductible contributions for charitable purposes.

For-profit race companies should have donors contribute directly to a local charity or commit to donating a portion of their net proceeds to charity, but be clear in your communications how registration fees will be expensed and contributions given to charity partners.

Some race directing companies have created “foundations” as charitable organizations.  It is very important for these types of business structures to have a clear conflict of interest policy and operating procedures for the foundation.  The foundation board of directors must ensure that the for-profit race directing company is not directly benefiting from the foundation in ways that are illegal or unethical.               

Maintaining Integrity in Charity Relationships

Former North Carolina State Rep Mike Walsh outlined their local approach to working with charity partners. “As a club we divided the work with our charity partners so that the vast majority of the race planning and execution fell on the club side, and the vast majority of non-race items and sponsorship acquisition fell to the charity partner,” explained Walsh. “Generally the charities have development personnel that do that for a living, and that approach worked fairly well with some charity partners.  There were a few different revenue share models, but typically our club would pre-negotiate a specific amount that would go to the club to fund our programs with the remainder going to the charity partner.”

Some organizations have developed other models to support local charities such as making contributions to local organizations based on the number of volunteers recruited by the charity.  Contributions are often given to these organizations based on their level of involvement with the race.  Event directors should be clear with these charity partners that they are providing a contribution to their organization and not paying the organization to staff their event. Formal written letters of understanding or donor agreement letters can go a long way towards clarifying expectations for both parties.

Raising money to cover administrative expenses is the hardest dollar to raise and should not be viewed in a negative light so long as the charity partner reports a program to administrative cost ratio between 70-80% program expenses to 30-20% administrative expenses (including fundraising and marketing activities).  An administrative cost ratio exceeding 35% is considered excessive by charity watchdog groups.

Events must work with charities to ensure that the money donated by the event or the event participants is going to a reputable organization.  Events and participants can use tools such as www.guidestar.org to check on their charity partners from time to time.  Ask to see the financial statements or tax returns from local charities before agreeing to work with them or raise money on their behalf.  Review the program to administrative cost ratio on the IRS 990 form to determine whether your charity partner has an administrative cost ratio within the acceptable limits.  Ask the charity how the funds you collect on their behalf will be spent.  Will the money be spent on program work or administrative costs?  Will your contribution from race proceeds or collected contributions from participants be a restricted gift from the race or will it be a general contribution to be used to cover administrative expenses?  These are questions your board will need to address before money changes hands so all parties have clear expectations. If your event is donating a portion of your net profits to a local charity, it is appropriate to restrict the use of your contribution to a specific program as opposed to allowing the charity to use the funds for administration expenses.  You simply need to include a letter of instruction with the contribution restricting the gift for a specific program.

Now I come to the unsettling article in the San Diego Union-Tribune on May 15, 2009 about the San Diego Rock’n’Roll Marathon and the relationship between Elite Racing and the Elite Racing Foundation now owned by the Competitor Group.  The article outlines that an “audit found that the foundation and the private business lacked a clear line of delineation, allowing funds to be transferred back and forth with poor bookkeeping and a lack of checks and balances…. Some nonprofit watchdogs said the scope of the problem is alarming.”  The race director, an employee of the for-profit Elite Racing, was the Chair of the nonprofit Elite Racing Foundation, which is a clear conflict of interest considering money was changing hands between the two separate entities.  Competitor Group has pledged to return $340,000 of public money improperly used from the foundation by the race management company.

My reaction to the San Diego Union-Tribune article is that we should all be concerned about the governance and management of nonprofit events. This article is meant to serve as a call to action to all race directors and boards of trustees to be transparent in the governance of your nonprofit events in the ever-increasing profitable environment for events nationwide.  Be transparent in your approach to working with charity partners and be transparent in your relationships between paid staff, independent contractors, and board members.  Take time to review your practices and strengthen your organization through policies and procedures.  If you are concerned about questionable practices by event directors in your community, contact your local permitting agency and the RRCA to review your concerns, because impropriety in the management of our sport by some will create challenges for all.

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