Earned Revenue

A nonprofit is organized for a particular mission, and the revenue related to that mission is nontaxable. But there are instances when a nonprofit does something the IRS deems to be not part of its mission. That revenue is classified as unrelated business income and subject to tax.

For example, if your nonprofit news site sells advertising, you may see that as supporting the mission, but the IRS can rule it as unrelated income. The distinction could be based on the ad’s content. If it is about the goods and services of the advertiser, or a company’s current special offers, it is not supporting the nonprofit mission. But if the ad space showcases a company as a proud sponsor of the nonprofit, then that revenue would more likely be recognized by the IRS as supporting the mission and therefore not subject to the unrelated business income tax (or UBIT). It is best to check with your accountant or tax adviser as you pursue an earned income strategy.

Other examples of unrelated income:

  • A nonprofit regularly uses its staff talent to perform services for pay. A health news website makes videos for its sponsors, such as a local gym, to use on their websites to attract customers. That work may seem aligned with the health site’s mission, but the IRS could call it unrelated income.
  • A nonprofit sublets a portion of its office and the rent passes through the nonprofit rather than being paid directly by the subtenant to the landlord.

Some nonprofits may also owe state or local income tax on unrelated income. These jurisdictions generally follows the same IRS guidelines, but nonprofits should check with a tax preparer familiar with both their local laws and Form 990, which tax-exempt organizations must file each year with the IRS.

RESOURCES: IRS Publication on Unrelated Business Income Tax, What Nonprofits Need to Know about Form 990