Nonprofits Pay Income Taxes

It may come as a surprise to many, but nonprofits can have taxable income, known as Unrelated Business Taxable Income (UBTI).  Even if they get a tax exemption from the IRS.

If an organization has UBTI of $1,000, it must submit 990-T Unrelated Business. You can check out his form at the IRS website –https://www.irs.gov/pub/irs-pdf/f990t.pdf

The government defines taxable income as income not substantially related to the organization’s tax-exempt purposes or activities. The idea is to prevent nonprofit organizations from competing with for-profit firms unfairly. The tax due is known as Unrelated Business Income Tax (UBIT), and it conforms to the corporate tax rate. Often, an activity generates unrelated business income if it meets three requirements:

  1. It’s a trade or business
  2. It’s regularly carried on, and
  3. It’s not substantially related to furthering the exempt purpose of the organization.

For example, an organization runs a pizza parlor selling pizza to the public. The nonprofit’s mission and programs don’t relate to the parlor’s business. The nonprofit pays employees to run the pizza place. All this information points to the pizza parlor generating unrelated business income that’s taxable.

On the other hand, a humanitarian-service organization holds a bake sale. While the sale is unrelated to the mission, It’s likely to be tax-exempt if not “regularly carried on.” Nonprofit’s activities are considered regularly carried on if they show a frequency, continuity, similarity to comparable commercial activities of for-profit businesses.

Some unrelated business activities may not be taxed. For instance, if an organization sells donated items, or if volunteers perform all the labor involved in the business, proceeds are exempt from taxes.

Note that if the IRS notices too much UBTI, it may revoke the tax-exempt status, which can spell disaster for a nonprofit. To avoid this potential risk, organizations should consider the following:

  • Resources and volunteers must spend most of the time on the mission, not business activities
  • Most of the revenue must come from the public and mission-related programs. The percentage of business income should be minimal

 

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide – Second Edition — First edition nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

 

 

Prevent Volunteer Liability

If you’re around nonprofits, you know that many rely on volunteers for operations, special events, and programs.  According to the U.S. Bureau of Statistics, “about 62.6 million people volunteered through or for an organization at least once between September 2014 and September 2015.”

Usually, these people are good-hearted and do very good jobs.  However, we also have bad apples and those who misbehave or have incidents in the name of the organization. This creates a huge liability for the nonprofit that is counting all pennies to provide goods and services to the community.  It doesn’t matter that volunteers are not paid, they can still do damage that the nonprofit may be held liable for.

Actually,  “Good Samaritan” laws exist for volunteers in the case of personal liability, such as the Volunteer Protection Act of 1997. However, that doesn’t mean that the nonprofit is also covered under this act automatically. Better be safe than sorry.

Training

Usually, when things go wrong, the issue of proper training and oversight of volunteers is often questioned.  So, proper training and supervision is a must in any volunteer situation, including making sure they get an appropriate education and are placed in situations where they are qualified to be.  For example, if you run a swimming class, make sure the lifeguards are properly certified and trained to identify problems and take care of them. Swimming instructors should also have minimum qualifications for the job.  Just because it’s a volunteer situation doesn’t mean that standards can to be lowered.

Policies and procedures manual

Helping to maintain standards, many nonprofits use manuals to clarify policies and procedures, very similar to those created for employees.  Be sure that such manuals include sections about prevention of sexual harassment, safety and proper behavior in the workplace.  Also, consider policies and procedures about volunteer disciplinary actions when warranted.

Background check

One way to avoid unpleasant surprises is to do a background check on all volunteers, even if they cost a bit. It doesn’t mean that everybody should be perfect, but if someone has a riskier background with problems with the law, they may need to be more closely supervised and placed in jobs that don’t compromise the organization.  Also, many insurance companies require such background checks when they cover volunteer activities.

Insurance

Nonprofits must consider getting volunteer insurance policies to protect the organization from volunteers behaving badly or accidents.  Beware that because volunteers are unpaid, they are NOT usually covered by worker’s compensation insurance, and if something happens to them, the nonprofit may be on the hook for it. So, consider adding a rider or a separate policy to include volunteer while they work for the organization.

Volunteers are often wonderful and many organizations wouldn’t be able to offer their programs if it was not for them. However, they also present a liability to nonprofits that must be addressed. Since protecting nonprofits against these risks can be expensive, be sure to include these costs when preparing budgets, grant proposals or gift requests so that you have the required funds to protect the organization against any losses.

Check out my book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition Nominated for the 2016 McAdam Book Award

Nonprofits – Mind Your Programs

The program area is the most important facet of a nonprofit organization. It defines the organization and it justifies its existence.  Without programs, the nonprofit has no reason to exist.  It doesn’t mean that all programs should be the same since nonprofits have different goals. For instance, if the purpose of an organization is to help the homeless, the nonprofit will offer programs in accordance with this goal. Most likely programs would involve temporary housing, food distribution, and job training.

Identification

This seems to be a no-brainer, but sometimes it can be a challenge. A program in one place may be fundraising in another organization. For instance, a nonprofit could sell used clothes in a thrift shop. The thrift shop is most likely part of the fundraising area and not the program. However, if the organization provides job training for teens, the thrift shop may be part of a program, especially if it has teens working there, being trained in the shop’s operations and selling techniques.

The first step in identifying programs is to look at the organization’s mission statement. A good, clear mission statement is critical. The clearer and simpler the mission statement, the easier it is to identify major programs–the reasons for the organization to exist. Suppose a nonprofit’s mission statement is to “provide temporary shelter to the homeless.” It is simple and focused. If the organization hosts a car race, then it is not part of a program–most likely it’s fundraising.

On the other hand, an organization with the mission statement “helping people to become self-sufficient” is too general, increasing the chances of confusion about what is a program and what is not. The more focused the mission statement, the easier it is to identify programs versus other operational areas. It makes it easier for the organization to stay on track, as well.

It’s worth noting that the IRS is also interested in this area, as both program information and mission statement are required on the tax form 990. If programs don’t connect well to the mission statement, the organization tax-exempt status may be at risk.

>>> Beware

“Mission creep” is an important item that should be reviewed often.  This creep usually happens when certain stakeholders want to take the nonprofit in directions not really related to its mission statement.  Donors and grantors may also contribute to this creep by offering funds for programs outside the scope of the organization’s mission. It’s management responsibility to identify and avoid mission creep. Or the nonprofit will be all over the place without a real path or strategy. Depending on the case, it may jeopardize its tax exemption as well.

Check out the book d“Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.