What Is Profit Called in a Nonprofit Organization?
The profit of a nonprofit organization is called a net asset. It's computed by deducting expenses and losses from the amount of revenue.3 min read
What is profit called in a nonprofit organization? The profit of a nonprofit organization is called a net asset. It's computed by deducting expenses and losses from the amount of revenue.
What Is a Nonprofit Organization?
The IRS grants tax exemption to a nonprofit organization. Individuals and businesses who make donations to a nonprofit organization can deduct the number of donations while calculating their taxable income. However, nonprofit organizations must disclose their operational and financial information to the public in order to assure donors that their contributions are used properly.
Nonprofits do not pay income tax on the amount of donation received or money earned through fundraising. Nonprofit organizations are often referred to as NPO and 501(c)(3) organizations.
To get the nonprofit designation, an organization must further a religious, charitable, scientific, educational, public safety, literary, or cruelty prevention cause and generate public benefit in some manner.
Nonprofit vs. Not-for-Profit Organizations
An NFPO, or a not-for-profit organization, is a wide term that includes nonprofit, charitable, non-governmental, civil society, and private voluntary organizations. If an organization provides goods or services without making any profits for private benefit, it is more appropriate to call it a not-for-profit organization.
Nonprofit and not-for-profit organizations may make profits from their operations but they use the generated profits to further the objectives of the organization, ultimately benefiting the public.
Income vs. Revenue of a Nonprofit Organization
Unlike for-profit businesses that make profits to create wealth for their owners, nonprofit organizations mainly get their revenue from donations, contributions, and membership fees. Some nonprofit organizations may earn revenue by selling products. For example, an organization against animal cruelty may sell T-shirts printed with messages to promote its campaign. IRS-approved nonprofit organizations are exempt from paying income tax.
Nonprofit organization revenue refers to the funds generated through its primary operations. It may include amounts collected through contributions, fundraising, membership, and service fees.
There are three types of nonprofit revenue:
- Temporarily restricted
Restricted and temporarily restricted funds are considered principal. These funds can be restricted either by purpose or for a certain period of time. All other funds that the organization collects are unrestricted revenues.
The net asset of a nonprofit organization is the equivalent of the income of a for-profit business. It's computed by deducting expenses and losses from the amount of revenue.
Nonprofit expenses usually include:
- Program expenses (resources used for conducting its programs)
- Support expenses (resources used for management and fundraising activities)
So, revenue refers to the total amount of funds generated. Income is revenue minus expenses and losses.
A nonprofit organization shows its revenue and net assets (income) in its Statement of Activities, which is similar to the income statement of a for-profit business, and Statement of Financial Position. These two statements detail the organization's financial health.
A nonprofit corporation is not formed to create wealth for its shareholders. Instead, it's intended to serve an approved purpose of public benefit. Because of this, it's accorded a special treatment for taxation.
Sometimes, a nonprofit organization may make a profit, which may or may not be taxed, depending on whether the profit is made from related or unrelated activities.
Profit From Related Activities
Just like any other business, a nonprofit organization must generate revenue to cover various expenses, such as utility bills, employees' salary, and operating costs. Sometimes the amount of revenue generated may be more than the expenses, resulting in a surplus revenue or profit. Nonprofit organizations do not pay taxes on such profit if it is generated from activities related to the mission or purpose of such an organization.
For example, a nonprofit organization, with a mission to encourage literature and set up public libraries, organizes a series of lectures by famous authors and earns surplus revenue from entry fees. Such profit would be exempt from tax since it's directly associated with the organization's mission.
Profit From Unrelated Activities
Sometimes, nonprofit organizations may earn profit from activities not related to their mission. For example, an organization engaged in providing clothes to street kids may set up its own facility for conducting charity events. When it's not using the facility for its own events, it rents the space to others, earning rental income in the process. Since such profit is not associated with the main purpose of the organization, it would be taxed like any other business income.
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