Nonprofits, by definition, exist not to make money, but to fulfill one of the exempt purposes recognized by federal law: charitable, educational, scientific, or literary. The idea that a nonprofit cannot make a profit simply isn’t true.
Nonprofits have normal expenses just like any ordinary for-profit business. There are salaries, utilities, and operating costs to pay. Those things don’t go away simply because you are providing a charitable service. Not only does a nonprofit need to make money to stay afloat, but they also want to make enough to grow their reach and serve the community further.
In other words, your nonprofit can make a profit. Whether or not that income is taxable depends on if the activities conducted are related to the nonprofit’s purpose. The IRS looks at nonprofit income in two ways: related and unrelated.
Related business activities are activities a nonprofit conducts that directly correspond to its stated mission goals. For instance, a library that hosts a reading camp each summer would consider the income from the reading camp to be related to their exempt purpose. Any profit made from related activities is not taxable.
Unrelated business activities (UBI) are a little more subjective. They occur when a nonprofit conducts business beyond the scope of its primary purpose. Revenue generated this way may be subject to income tax. The first $1,000 of UBI is tax-exempt. It is not necessarily a bad thing for a nonprofit organization to have UBI; however, they unrelated business activities should not become the primary focus of the organization. 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, or the nonprofit may risk losing its tax-exempt status.
The IRS requires that Form 990-T be filed for unrelated business activities in addition to the obligation to file the annual return, 990, 990-EZ or 990-PF. For further understanding of the UBI rules, please refer to our previous article, “What is Unrelated Business Income Tax (UBIT)?” or refer to the IRS website, https://www.irs.gov/charities-and-nonprofits.
To summarize, a nonprofit organization can and should strive to make a profit in order to continue to fulfill its exempt purpose. The nature of the profit-making activities will depend on whether or not that income is related or unrelated, and if that income is taxable by the IRS.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
