Tax Concerns When Your Nonprofit Corporation Earns Money
It's a myth that your 501(c)(3) nonprofit organization can't make a profit, but some of it may be taxable. Nonprofit corporations, by definition, exist not to make money but to fulfill one of the purposes recognized by federal law: charitable, educational, scientific, or literary. Under state and federal tax laws, however, as long as a nonprofit corporation is organized and operated for a recognized nonprofit purpose and has secured the propertax exemptions, it can take in more money than it spends to conduct its activities.
In other words, your nonprofit can make a profit. Whether or not a nonprofit's income is taxable depends on whether the activities are related to the nonprofit's purpose.
Making a Profit From "Related" Activities
Tax-exempt nonprofits often make money as a result of their activities and use it to cover expenses. In fact, this income can be essential to an organization's survival. As long as a nonprofit's activities are associated with the nonprofit's purpose, any profit made from them isn't taxable.
Making a Profit From "Unrelated" Business Activities
Sometimes nonprofits make money in ways that aren't related to their nonprofit purposes. While nonprofits can usually earn unrelated business income without jeopardizing their nonprofit status, they have to pay corporate income taxes on it, under both state and federal corporate tax rules.
In some situations, excessive unrelated business activities can also prompt the IRS to reconsider a nonprofit's 501(c)(3) tax-exempt status. To avoid this, a nonprofit should never let its unrelated business activities reach the point where it starts to look like a regular commercial business. For instance, unrelated business activities shouldn't absorb a substantial amount of staff time, require additional paid staff or volunteers, or produce much more income than that generated by the organization's exempt activities.
Activities That Are Not Taxed
Because the difference between "related" and "unrelated" activities can be confusing, the IRS has said that some activities will not be taxed, even if they aren't related to the nonprofit's purpose. Here's a quick rundown of the activities that aren't taxed:
- activities in which nearly all the work is done by volunteers
- activities carried on primarily for the benefit of members, students, patients, officers, or employees (such as a hospital gift shop for patients or employees)
- sales of merchandise that has been mostly donated to the nonprofit (such as a thrift store)
- the rental or exchange of mailing lists of donors or members, and
- the distribution of items worth less than $5 as incentives for donating money (such as stamps or pre-printed mailing labels).
Tax Concerns When Your Nonprofit Corporation Earns Money
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