The driven people behind non-profit organizations are truly special. Often, these focused individuals pour everything they have into making a difference in their community, drawing others to their cause, and gaining supporters along the way. However, no matter how large or small a non-profit organization (NPO) is, at some point, they may struggle to cover the costs involved with running an organization.
Unfortunately, government grants and institutional funding are getting harder and harder to acquire. The number of NPOs is greater than ever, and the supply of funding simply hasn’t risen to meet the demand. This has led many non-profit organizations to turn to other means of financing. Some rely heavily on charity events and fund-raisers. For other NPOs, crowdfunding has proven very successful.
But what about selling merchandise? Can a non-profit organization sell products or services while still maintaining its tax-exempt status?
Can a Non-profit Organization Sell Merchandise?
The short answer is YES! Non-profit organizations can sell products and services while maintaining their tax-exempt status. However, there are some stipulations.
Understanding Unrelated Business Income Tax
Generally speaking, an NPO may earn revenue on a tax-free basis, as long as the merchandise or service being provided is directly benefiting the organization’s goal or mission.
A prime example of a related merchandise income is the cookie selling program of The Girl Scouts of America. Their mission is to build “girls of courage, confidence, and character, who make the world a better place.” So even though the girls involved in the program don’t actually make the cookies themselves, they actively market, sell, and deliver them, in turn helping to develop vocational skills and build character. To the IRS, this is considered a related method of generating income for the organization.
However, if a non-profit organization makes substantial revenue by selling products or services that don’t directly relate to its mission, it may be subjected to” unrelated business income tax.”
According to the IRS: “For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.” “An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T.”
Take museums, for example. Even though many museums are non-profit organizations with a goal of educating the public, income generated from a gift shop would be considered unrelated business income because the items sold don’t provide educational value.
So to sum it all up, yes, NPOs are allowed to sell merchandise. Still, organizations need to be very clear about their motives in selling, and if needed, file the appropriate paperwork to maintain their tax-exempt status.
Looking to Make a Difference in the World?
At Causability, we believe every cause deserves love. If you have an idea, passion, or goal that can change the world, we want to help it gain momentum. Causability can put you in touch with the right people and help you get the funding you need to start making a real difference. So get in touch with us today and start making your dreams a reality.