• Michael Kolodner

[Hard or Soft] Credit Where Credit is Due, part 1

I like giving people credit.


Not extending them credit, like a loan.


Not tracking their progress toward graduation, like course credit.


I’m talking about giving people credit for donations. You want to know who your donors are and how much they’ve given, right?


Well if you’re a nerd like me you also want to know how much they gave compared to how much they “got.”


At the very most basic level there are two kinds of donations someone could get “credit” for: money they gave or money they influenced. In development lingo, those are “give or get” or “hard credit” and “soft credit.”


Before I delve any deeper, let me start with a caveat: not all organizations think about hard and soft credit the same way. And there are lots of organizations that just don’t really get into soft credit at all. But for those that do, it’s pretty important to understand the nuances. If your organization decides you’re not going to put a lot of time or effort into the distinctions, that’s OK, but you should know they exist so you can communicate clearly with other organizations.


Since this is a Salesforce-focused blog, we’re also going to delve into how to think about hard and soft credit in your system of record. But that’s going to be mostly saved for the next post.


A Simple Rubric

I have a simple rubric for you to use: “Whose check was it?”


Hard Credit refers to funds that come directly from the individual or organization in question. If the answer is “It was Shoshanna’s check,” then that’s hard credit to Shoshanna.


If we are going to be strict in our tracking, then hard credit is only given to the legal entity that gave away their own money. If we think in terms of the United States tax system, it’s the entity that will be able to claim the donation as a deduction if they itemize on their tax return. If your tax system is different, you might not need to worry about who will claim the deduction, but I think you probably still want to know when someone was giving you their own money versus someone else’s.


An example of hard credit: Oliver “Daddy” Warbucks gives $500 to the Hudson Street Orphanage.


Soft Credit, on the other hand, recognizes influence over the funds. What makes it “soft” is that it’s credit for a donation that a contact did not actually make, but somehow influenced. The other “soft” part of soft credit is that your organization could give soft credit to multiple people for the same gift.


The classic soft credit example is a matching gift from a donor’s employer.


Let’s say The War Profiteering Company (WPC) has a 2:1 match policy. So after a simple application process, Warbucks’ gift from above is matched with a $1000 contribution from WPC. That gift is soft credit to Oliver because he influenced it but didn’t give it. It’s clear that the money came from the company’s coffers.


That example is fairly straightforward because the matching gift is only soft-credited to Oliver Warbucks. If he hadn’t given his own gift, there would be no match.


Next, Warbucks calls up his close friend Mr. Munitions and asks him to please donate to Hudson Street Orphanage because of the wonderful singing lessons they provide in addition to food and shelter. Mr. Munitions is rather cheap and he doesn’t say yes at first. But when he is also asked to give to the Hudson Street Orphanage by Goody Twoshoes, Mr. Munitions sends a $150 gift. Now we give hard credit to Mr. Munitions and soft credit (as “influencer” or “solicitor”) to both Oliver Warbucks and Goody Twoshoes.


Notice that a single $150 gift has just resulted in two solicitors getting credit. There is now a total of $300 in soft credit awarded. That’s where things get “soft.”


For those keeping score, Oliver Warbucks now has $500 in hard credit and $1,150 in soft credit. If asked, you might say that Mr. Warbucks has “raised $1,650 this year.” “Raised,” in this context, would mean “give or get.” Meanwhile, Goody Twoshoes has also raised $150 even though she hasn’t actually given a donation. (And note that only $1,650 has been deposited in the bank account of Hudson Street Orphanage.)


Confusing Case: Donor Advised Funds

Donor Advised Funds (or DAFs) are increasingly common donors to nonprofit organizations in the United States. DAFs exist in the US primarily to manage tax implications. If you can donate an asset directly to a charity without selling that investment for cash first, then you won’t pay taxes on the amount that asset appreciated from when you first bought it. The most common investment to donate this way, of course, would be stocks, though the same would apply for any asset from a house to your grandmother’s diamond engagement ring. Unfortunately, donating assets to an organization is a pain in the neck, both for the donor and the organization. Most charities just don’t have systems in place to receive a donated stock, let alone a property! And if you wanted to split the value of an asset between more than one organization, how would that even work? DAFs ease the burden by allowing you to donate the appreciated asset to the DAF, which is set up to be able to accept such donations. The DAF sells the asset for cash and then you, as the advisor, can direct where the DAF will send the money it has on hand.


My wife and I have a DAF called the Tree Brother Fund that is managed by the Philadelphia Foundation. We set it up because we made some lucky investments in our 20’s. (Thank you, Apple Computer!) If we were to sell those stocks we would have to pay capital gains taxes, leaving less money for us to give to charity. Instead, we donate the stock to the Tree Brother Fund directly. Since we never sold it, we have no capital gains. That’s a great tax bonus!


The other bonus is that the Philadelphia Foundation is used to accepting stock donations, so it’s quite easy. Not all charities are set up to accept donations other than money. One of my prior employers was notified that a donor wanted to give us appreciated stock. We had to open a brokerage account to receive the stock, give all the account details to the broker for the donor to facilitate the transfer, then sell the stocks immediately upon receipt, and then properly account for the transactions. I’m not really sure that the value of the donation was worthwhile once you factored in the time and effort we had to spend receiving it.


Getting back to the discussion of hard credit and soft credit: When I donate an asset to my donor advised fund, that is the moment I get a tax deduction. I have donated to the DAF. (From the perspective of the DAF, my donation would be hard credit.) But the donation to the DAF is not the perspective I’m usually working from, and I expect it’s not your perspective. Once the DAF has money in its account, it sends grants to nonprofits like the Hudson Street Orphanage. That’s the perspective we’re interested in.


When the money arrives at Hudson Street, all we have to ask is “Whose check was it?” And the answer is clear: the DAF’s. Therefore, the DAF gets hard credit and whoever directed the DAF to make that grant gets soft credit.


Back to the fictional world: Goody Twoshoes donates 10 shares of WarCo stock to her donor advised fund, the Shoe Fits Fund. She then directs the fund to grant $125 to Hudson Street Orphanage. HSO records a $125 donation from Shoe Fits and gives soft credit to Goody.


Let’s update the talley sheet:

Oliver Warbucks: $500 gift (hard credit), $1,150 in soft credit.

War Profiteering Co: $1,000 match gift on behalf of Daddy Warbucks

Shoe Fits Fund: $125 gift on behalf of Goody Twoshoes

Goody Twoshoes: $275 in soft credit

Mr. Munitions: $150 gift (hard credit)

$1,775 has been deposited in the bank account of Hudson Street Orphanage. (4 gifts)


I strongly argue that this is the “right” way to think about things. But as you're probably starting to realize, it takes a lot of data to describe all those nuances.


Next week we’re going to talk about how you actually record things in Salesforce.

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