How to Keep Your Tax-Exempt Status While Boosting Your Mission
A Tax Guide for Nonprofits with Side Hustles or Commercial Ventures in the US and Australia
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Running a nonprofit can be profoundly fulfilling yet financially challenging. Supplementing funds through a side hustle or commercial venture can significantly strengthen your mission. However, understanding the tax implications is crucial before investing in a charity-operated bakery or leasing office space.
I was inspired to write this story after designing a similar venture, which you can learn more about in my article titled How I Architected a Charity Organization & Why I Will Run It Like a Business.
Based on a valuable comment from reader Kurt Dillon, who runs multiple charity organizations in the US, kindly prompted me. Considering Kurt’s valuable feedback, I invited my international tax advisor friend to a Sunday barbecue in our backyard earlier today. Although it was winter at 15 C, it was a sunny day in Melbourne.
My friend specializes in tax regulations in both the United States and Australia, where I reside and am registered for tax purposes. We discussed the details for around two hours. It took a long because financial matters are not my forte, so I asked many basic questions. He made it crystal clear to me.
Therefore, I decided to share the valuable insights I gained in this brief story, highlighting key points and potential implications for organizations like ours in the US and Australia, and I hope it might help some of my readers.
However, although I have worked in the corporate world for 42 years and have had a private company since 1995, I want to emphasize that I am not a tax professional, and my knowledge is limited.
Therefore, this information is not intended to be financial or legal advice. It is a transparent account of my learning process, presented to inform and potentially benefit others facing similar considerations.
The Deal with Tax-Exempt Status in the USA for Nonprofits with Side Hustles or Commercial Ventures
Nonprofits benefit from IRS exemptions from certain taxes, ensuring more funds directly support their causes.
However, straying into significant for-profit activities can jeopardize tax-exempt status. For instance, launching a café that competes with local businesses could raise concerns if profits overshadow charitable efforts.
Balancing commercial activities with charitable goals is crucial. Selling crafts made by beneficiaries generally aligns with nonprofit missions, while ventures like luxury car dealerships typically do not unless directly serving charitable purposes. Renting office space can be acceptable depending on income generation and relevance to the mission.
Unrelated Business Income Tax (UBIT)
Income unrelated to the nonprofit’s mission may trigger UBIT. This tax ensures fairness when nonprofits engage in profitable but non-mission-related activities. However, exemptions may apply for income generated by volunteers or activities conducted for member convenience.
Smart Compliance Tips
Ensure every commercial venture directly supports your cause.
Seek advice from nonprofit tax advisors.
Limit unrelated activities to avoid IRS scrutiny.
Clear records demonstrate how commercial ventures advance your mission.
An Informed Perspective from a Reader
Aligning with my tax advisor’s feedback, here is what Kurt said in my story for your information:
“An excellent piece, Doc, and a great idea. The only caution I would have — as the owner of several charitable organizations and more than a few for-profit ones, the tax laws (at least here in the US) for non-profits are very specific when the job-profits engage in commercial activities that rival those of for-profit companies. Under those circumstances, the laws here cause the non-profit to forfeit the tax breaks, which give it an advantage in being a nonprofit.
For example. If you create a church here in the US, and as a commercial arm, you decide you want to open a burger restaurant with the sole intention of having that church-owned burger restaurant serve as a constant revenue stream for the church, the government will promptly revoke the churches tax-exempt status on all areas pertaining to the burger restaurant because that burger restaurant would I have an unfair advantage over privately owned competing burger restaurants that don’t have similar tax-exempt status, thereby leveling the playing field for all burger restaurants.
There may be some types of commercial business you could engage in that do not directly compete with other for profit companies producing the same goods or services, but I’ve not been able to find one that would allow me to keep my tax free status yet and I’ve been running both for about 30 years now.
So just a heads up to look out for.”
Australian Tax Rules for Nonprofits with Side Hustles or Commercial Ventures
Australian nonprofits navigate a similar tax landscape overseen by the Australian Charities and Not-for-profits Commission (ACNC). Key compliance points include:
Commercial activities must benefit charitable goals directly.
Reinvest profits into the charity or distribute them in ways that advance charitable purposes, such as scholarships or grants, to maintain tax exemptions.
Activities directly related to the charity’s mission usually qualify for tax exemptions, while unrelated ventures face stricter scrutiny but can be permissible with proper profit allocation.
Avoiding Pitfalls
Ensure profits primarily serve charitable purposes while providing reasonable remuneration for staff or volunteers involved in commercial activities.
Avoid practices that give your charity an unfair advantage over for-profit businesses, such as price undercutting due to tax exemptions or subsidies.
Example Scenarios
Acceptable Activity: A nonprofit thrift store offering job training for the homeless and using proceeds to support its mission.
Riskier Venture: A highly profitable restaurant where funds primarily fuel expansion rather than directly supporting the charity’s core mission.
Conclusions and Takeaways
Integrating commercial ventures into nonprofit strategies can amplify impact if managed wisely.
Aligning activities with charitable missions and complying with tax regulations in the US and Australia are crucial for sustaining nonprofit status and maximizing benefits for your cause.
Transparency, strategic planning, and professional advice are essential for effectively navigating these complexities.
If you have experience running a charity organization with a commercial arm, please share your experiences so we can learn from each other.
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