A 501(c)(3) organization CAN make a profit while being registered as a nonprofit. Even though an organization’s nonprofit status may preclude them from paying income taxes on profits earned, there are possible tax liabilities with earned revenue that need to be considered.
Nonprofit Activities are Important
A 501(c)(3) recognition allows a nonprofit corporation to fulfill certain purposes related to the mission and take in donations without needing to pay taxes. Those purposes as recognized by the federal government are charitable, educational, scientific or literary. As long as income arrives through one of those activities, even if the amount exceeds what is needed, the IRS will not require it to be taxed.
For example, let’s create a nonprofit that refurbishes old and used guitars. These guitars are given to at-risk children to inspire an interest in music and to teach them how to play. The organization holds a fundraising event, inviting a famous guitar player to perform on stage. Money raised at the event will be used toward guitar refurbishment costs.
The event raises $50,000 more than is needed. What can the organization do with these extra unanticipated funds?
The organization will not lose its tax-exempt status because the income is related to activities designated by the mission and will not be taxed. That $50,000 can be saved and used at another time to pay the salaries of those who refurbish the guitars or as a cushion when contributions are low. The money CANNOT be distributed to officers, directors or anyone else who works with or is connected to the organization.
Nonprofits and “Unrelated Business Activities”
There are always opportunities for nonprofits to make money that might not be related to the activities granting them the 501(c)(3) designation. In these situations, the organization would need to pay corporate income taxes to both the federal government and the state.
Let’s take our guitar nonprofit as an example again. The organization receives some very rare guitars and decides to sell them rather than auction them off because of their worth. The income generated by the sale COULD be taxed especially if the organization begins to generate regular income from sales of rare guitars. These sales deviate from the organization’s mission-driven purpose of refurbishing old guitars to benefit the children in their programming and the IRS could reconsider the 501(c)(3) status if a nonprofit has too many “unrelated business activities”. All nonprofits need to be cognizant of the process and purpose of generated income to avoid risking their tax-exempt status.
What “Unrelated Activities” Aren’t Taxed?
The IRS lists specific activities that will not be taxed even if they aren’t part of the organization’s related work. These include:
- work that is done by volunteers
- sales of merchandise from shops, such as a thrift store
- the rental or exchange of mailing lists of donors or members
Do you have questions about the money you generate and your tax-exempt status? Are you looking for an accountant that is fully invested in promoting your mission and managing your money while safeguarding your nonprofit status?