Non-profit organizations often engage in activities to make money to pay for the organization’s expenses. Income generated from activities unrelated to the core purpose of the non-profit (called unrelated business income, or UBI) can have tax consequences. Any UBI must be reported in Form 990-T.
Income is considered to be UBI if the activity is:
- a trade or business (meaning your non-profit does it in order to sell goods or services or to make money) and
- regularly carried on (if it is done with the same frequency that a for-profit business would do it… that can mean daily, weekly, monthly, or seasonally depending on the activity) and
- not substantially related to the reason the non-profit qualifies for a tax exemption.
Monies generated at one-time event (even if the event lasts a week) would not be considered unrelated business income, even if its done for trade and is not substantially related. Money from the sale of educational products related to the non-profit would also not be considered UBI, even if regularly carried out and conducted as a business. In other words, only activities that pass all three tests generate unrelated business income.
There are several ways that non-profit organizations can make money without triggering tax repercussions, even if the activity would seem to generate unrelated business income. Money generated from the following activities is tax-free:
- fundraisers or other activities that are carried out almost entirely by volunteers (85% or more)
- programs or activities that benefit the employees, members, or clients of the non-profit (such as a hospital gift shop, an on-site cafeteria, or a coin-laundry at a summer camp)
- Sales of donated items such as in thrift stores, used book sales, or yard/tag sales
- renting or exchanging donor/member mailing lists
- distribution of low-cost incentives (worth less than $8.60 in 2006) when soliciting donations (for instance, free note cards or address labels)
- income (for instance, from booth rental fees or conference registration fees) from conventions or trade shows that educate attendees about the products, services, and/or issues that are core the organization
- sponsorships (which, as opposed to advertising, can only show the contributor’s name and/or logo, but cannot advertise products or services. Only when a person buys and controls the content of a certain amount of space does the IRS consider it to be advertising.)
- traditional bingo (which the IRS says “must be one in which wagers are placed, winners are determined, and prizes are distributed in the presence of all persons placing wagers in that game.” Scratch-off games do not count. The game must be legal under state and local law, but not for for-profit organizations.”
- Income from interest and dividends
- Rental income from property owned by the non-profit
- Royalty income
- Gains or losses from the sale of property
Sometimes an activity can be partially tax-exempt income and UBI. For instance:
- a hospital’s on-site cafeteria can sell food to staff and patients and to the general public, which creates a UBI.
- a non-profit might have a store or catalog that sells educational books and videos that fit the organization’s exempt purpose, but t-shirts and calendars that do not. (Be careful about this – selling more than is typically might be considered unrelated business income even though the activity is “substantially related.”)
- a non-profit might publish and charge for a newsletter or magazine that is consistent with its tax-exempt purpose and sell advertising that is considered UBI.
If your non-profit conducts an activity that generates both tax-free income and unrelated business income, you must have a clear system for keeping track of the monies.
