Can a Non Profit Sell Goods? Everything You Need to Know
Can a non profit sell goods? A nonprofit can sell goods and often this is completed through donations or grants.4 min read
Updated September 6, 2021:
Can a Nonprofit Sell Goods or Merchandise?
A nonprofit can sell goods and often this is completed through donations or grants. Nonprofits can also sell services or goods to raise money. Consider that educational institutions and hospitals are nonprofit organizations, but still sell services or goods. Also, after covering the costs of operation, a nonprofit may end up with a profit or surplus. This has been the million dollar question as people often misunderstand how nonprofit organizations operate.
What Is the Main Goal of a Nonprofit?
The goal of a nonprofit is to support a cause. Therefore, nonprofits should not focus on generating income. In order to qualify as a nonprofit, the organization must show that they are working toward a public good. This type of work qualifies for special tax exemptions and is not meant to generate a profit. People who operate nonprofits are referred to as founders. They can generate income by being paid for their work by the nonprofit, but a founder shouldn't receive additional compensation.
Is a Nonprofit Considered a Big Business?
When most people think of the term “nonprofit,” a small charity may come to mind. However, the nonprofit sector is big business in the United States. Generally, nonprofits generate close to $900 billion each year which makes up more than 5 percent of the gross domestic product (GDP).
Healthcare organizations, educational institutions, and relationships groups are all good examples of nonprofits that deal with a lot of money. Many nonprofits see millions of dollars pass through the organization every year. In some cases, these groups can generate a profit while still preserving their status as a nonprofit. Despite those big financial numbers, there are rules and regulations surrounding nonprofits and many of the laws can be confusing.
What Organization Designates a Nonprofit Organization?
It is the responsibility of the Internal Revenue Service (IRS) to determine which groups are nonprofits and to regulate nonprofit tax information. Prior to initiating operations as a nonprofit, an organization must file for 501(c)(3) status. The majority of businesses are for-profit companies. Their primary financial goal is to generate a profit which is then distributed to shareholders, owners, or reinvested back into the entity. A company must pay taxes on generated profits.
Can Nonprofits Sell Things or Make A Profit?
In order to support their staff and operating costs, a nonprofit must generate revenue. Often, this is completed through donations and grants. Traditionally, a nonprofit organization would hold fundraising activities as one of the few ways to gain initial capital for operating expenses. Additionally, nonprofits can also sell services or goods to raise money through ecommerce store or social media platforms. For example, educational institutions and hospitals are both nonprofits, but both organizations still sell services and goods.
Sometimes a nonprofit may end up with a surplus after covering operating costs. To maintain their tax exempt status, this money must be generated from activities related to the mission of the organization. To clarify, a nonprofit may raise money from typical fundraising and associated events. However, if financial gain occurs from unrelated activities than that profit must be taxed as business income. A common example would be a nonprofit charging rent for an occupant using their business space. That income cannot be used towards nontaxable profits.
It is important to remember that nonprofits are not prohibited from engaging in activities that generate income. They can independently generate income or set up a relationship with a for-profit company.
How Can a Nonprofit Generate an Income on a Tax-Free Basis?
Typically, nonprofits may earn tax-free income if the income-generating activities are directly related to the purpose of exemption. At times, a nonprofit may engage in activities that generate income from activities unrelated to tax exemption purposes. This income may be subject to unrelated business income tax (UBIT) at the corporate tax rate. In these circumstances, certain tax exclusions exist and are clarified in Internal Revenue Code Section 513(a).
There are a few guidelines to determine if an income-generating activity is related or unrelated to the nonprofit's tax exempt purpose. These include:
- The circumstances and facts of each case
- The nonprofit's tax exempt purpose
- How the organization states its tax exemption in its application for tax exemption and in its corporate charter
- The extent and size of the activity
To be taxable, income-generating activities must be carried on regularly. The continuity and frequency of the activity should also be considered. If a similar for-profit business engages in an activity such as selling cookies year round, selling cookies for a one-week fundraising effort wouldn't constitute a regularly carried on activity.
Is There a Business Income Tax for Non Profits?
Any business, including nonprofit organizations, that carries products and merchandise, for example: books, coffee mugs or t-shirts, long term on their e-commerce platforms then tax laws, curated by the IRS, dictate that this particular revenue stream is not protected under their tax exempt status. For nonprofits, this is often referred to as unrelated business income.
While most nonprofit organizations revenue is tax exempt, some are hit with the unrelated business income tax. According to the Internal Revenue Code, unrelated business income is defined as any income from a business that doesn’t align with the basis of the organization’s exemption, including trade or activity that are not substantially related to charitable purposes.
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