What Happens When Your Nonprofit Profits?
Despite the term “nonprofit,” your nonprofit can make a profit. It’s not a bad thing since you need funds to conduct your activities. The real question is whether or not your profit is taxable – which depends on whether the activities are related to the nonprofit’s mission.
Profit from “Related” Activities
Tax-exempt nonprofits often make money as a result of their activities and use it to cover expenses. In fact, this income can be essential to an organization’s survival. As long as a nonprofit’s activities are associated with the nonprofit’s purpose, any profit made from them isn’t taxable.
Profit from “Unrelated” Business Activities
Nonprofits sometimes make money in ways that aren’t related to their nonprofit purposes. While nonprofits can usually earn unrelated business income without jeopardizing their nonprofit status, they have to pay corporate income taxes on it, under both state and federal corporate tax rules. (Generally, the first $1,000 of unrelated income is not taxed, but the remainder is.)
However, be mindful of excessive profit from unrelated business activities as this can also prompt the IRS to reconsider a nonprofit’s 501(c)(3) tax-exempt status. This can be avoided by never letting unrelated business activities reach the point where it starts to look like a regular commercial business.