The Internal Revenue Service (“IRS”) defines unrelated business income is income from a trade or business that is regularly carried on by a tax-exempt organization and that is not substantially related to the nonprofit’s exempt purpose. Click here to read IRS Publication 598.
Successful nonprofits are no different from any other business. That is to say, the focus is on a delivering a product or service. The difference, if any, may be that as a for-profit business aims to create customers, the nonprofit works to neutralize weaknesses and to make strengths effective through performance.
In difficult economic times, dollars dropped into collection plates are scarcer and nonprofits must always compete with other charities for ever-dwindling public dollars.
Consequently, successful nonprofits become social entrepreneurs and develop earned-income strategies in order to diversify their funding and guarantee sustainability. Ideally, the earned-income strategy is in perfect alignment with the charity’s core mission. For instance, a hospital pharmacy may sell pharmaceuticals to the general public without losing its identity as a charity.
However, when a 501(c)(3)’s earned-income strategy drifts away from its core mission, it risks the IRS classifying the activity a “trade or business.” The tax consequences can be devastating for a creative and well-meaning charity.
We are nonprofit specialists with years of experience in this area. Whether you’re considering the benefits of forming a nonprofit or looking for legal support for an existing organization, we can help. Please give us a call to discuss your business needs.
Please give us a call to discuss your business needs.
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