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The federal government sets pretty strict requirements on how nonprofit organizations must operate to maintain their tax-exempt status, especially regarding revenue. So the question remains, what are the nonprofit revenue requirements, and how do they impact how nonprofits can operate?
What You Need to Know
Can you make a profit as a nonprofit?
Yes, but it’s a bit more complicated than that. To maintain their 501c3 tax status, nonprofit organizations must be careful about profits unrelated to that nonprofit’s purpose. Since nonprofit income is generally not taxable, there is a very fine line to walk. Nonprofits exist for the purpose of serving the public in some way. However, through fundraising activities, sometimes nonprofits raise more money than they have expenses. As long as that profit is related to the purpose of the organization, this is okay.
What if a nonprofit does make a profit from unrelated activities?
This shouldn’t happen often; but if it does, you have to report it to the IRS as taxable income. Additionally, if this kind of activity occurs regularly, it could cause issues with IRS status. Here’s an example: let’s say you are a children’s literacy organization. To raise money, you start selling handmade candles and jewelry that some staff members created. If this is a fundraising activity, then profits are not taxable. However, if this turns into business activities, the organization may violate IRS requirements.
What percentage of funds can be spent on employees’ salaries?
This can vary widely, depending on the organization, its mission, and its structure. For some organizations, like the Make-a-Wish Foundation, 20% of funding goes toward salaries. For other organizations that depend on staff vs. vendors and volunteers, this could be as high as 50-75 percent.
The reason for this gap tends to be that so many organizations like schools are still classified as not-for-profits and can have very different needs and requirements for staff than others.
What is an acceptable amount of overhead spending?
Overhead spending is any spending not tied directly to the organization’s programs or services. This includes administrative services and salaries of employees not directly included in the programming, like accounting. It also includes fundraising expenses, as well as supplies and materials purchased.
The IRS Form 990 Series income tax form requires that tax-exempt organizations report any administrative or overhead expenses. Any organization that seems to be spending money in excess amounts in ways that do not fit with its mission could be subject to an audit.
Watchdog groups like Charity Watch will publish guidance, which will include recommendations, as well as ratings on charities on their websites. This will allow your nonprofit to know how much these organizations are spending on things like fundraising, the ratios of acquiring new donors, spending, and program costs.
Can the CEO of a nonprofit receive a salary?
Similar to a for-profit organization, the CEO may receive adequate compensation. A nonprofit organization may define this differently. According to Salary.com, the median salary for a nonprofit CEO is $150,000, and some in executive positions can make upwards of $250,000.
Due diligence is recommended so compensation does not run afoul of the IRS’s excess benefit transaction rule.
The IRS defines this as when, “economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of a disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration received by the organization.” This can result in sanctions and fines being handed out by the IRS on the relevant organizations.
What kind of activities are generally untaxed when it comes to revenue?
- The distribution of insubstantial items in exchange for funds, generally less than $5
- Activities done almost entirely by volunteers
- Any sales from merchandise donated to the nonprofit
- Any activities carried out mainly for the benefit of members, students, participants, or employees (a public hospital’s gift shop is an example)
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