Contrary to popular belief, a nonprofit can (and maybe even should) make a profit from its business activities. Depending on what the activity is, a nonprofit 501(c)(3) organization may not have to pay taxes on any profit it makes, such as activities that are related to its charitable purposes.
We define related business activity by first defining unrelated business activity. Unrelated business activity is:
- A trade or business;
- That is regularly carried on; and
- That is not substantially related to furthering the exempt purpose of the organization.
A related business activity is any activity that is substantially related to furthering the charitable purpose of the organization. Below are several examples of related business activity that are not taxable.
Farestart (Seattle, WA): Farestart is a nonprofit organization that runs a commercial restaurant in downtown Seattle. In order to run its kitchen and operations, Farestart employs persons who are experiencing poverty, homelessness, and hunger in order to help them transition into sustainable livelihoods. Farestart, like any other restaurant, offers its food and dishes to the general public for a price that is commensurate with other restaurants of its caliber in the area. Farestart makes a profit on its services and product, but does not have to pay taxes on those profits because its business activity (the operation of a restaurant) is directly related to its exempt purpose of alleviating poverty and homelessness.
Girl Scouts (New York City, NY): The sale of Girl Scout cookies is perhaps the most well-known example of how profitable business activity will not generate unrelated business income tax for an organization. The Girl Scouts make a massive profit every year on the sale of their cookies, but since the selling of cookies furthers their exempt purpose of building confidence and courage in young women by developing their financial literacy and entrepreneurial skills, not a single dollar is taxed. If your mission and exempt purpose uniquely lends itself to being supported by business activities, this method is a great way to generate a foundational revenue stream that will make your nonprofit a healthy and vibrant organization that will sustain itself for the years to come.
The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or using the firstname.lastname@example.org form, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Jacob Ferrari at email@example.com.