Electronic income

Nonprofit Files: Nonprofit Income and Tax Exemptions |

The most sacred thing for a non-profit organization is its mission. Equally important are federal and state tax exemptions available to nonprofits.

Government agencies involved in the nonprofit arena set guidelines and oversee when they provide financial benefits. Federal and state tax exemptions allow the nonprofit to make optimal use of its sources of income.

Eliminating the leakage of money from paying taxes is about making money. The untaxed income received by a non-profit organization is a huge benefit that preserves cash flow. It allows a nonprofit organization the financial capacity to continue to support its mission.

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Non-profit organizations that benefit from the exemption are required to identify their sources of income in the annual information return. If this annual report indicates that some income is outside of its purpose and mission, UBIT (Unlinked Business Income Tax) may apply.


Identifying and documenting sources of income requires proper accounting practices suggested by the IRS. If one or more sources of income record income that is not among the acceptable sources of income of a non-profit organization, UBIT may apply.

UBIT is a liability that non-profit organizations pay if they compete unfairly with for-profit companies that pay taxes on net income after expenses.

For-profit companies generate income, deduct the cost of their business expenses, pay dividends to shareholders and finally net income tax. It is the cost burden that exists in the for-profit business entity.

At the other end of this income / taxation spectrum is the non-profit organization. They generate income and benefit from income tax exemptions as long as they do not compete directly with the for-profit companies that bear the tax.

Once a non-profit organization competes directly with a for-profit company by offering the same product or service, this action creates an unfair business environment. Industry leaders, through their elected officials, have made this point of unfair competition very clear. Regulatory law and IRS monitoring of nonprofit income followed.

Annual information return

As a nonprofit organization grows its revenue base, the importance of annual disclosure becomes more important. The sources of income streams should be listed, and of course the IRS will actively consider any taxable income where UBIT applies.

Years ago, large nonprofits had huge revenues from trade shows, magazine advertising, and other revenues that the IRS referred to as nonprofits subject to the tax. tax. Since they competed with for-profit companies in certain areas of income, they were required to pay net income taxes after expenses by keeping only eligible income from their association status.

Compliance of results

There are basic revenue considerations for nonprofits. Keep an accurate set of books. Retain all original source documents for at least seven years. Display and identify all sources of income. Indicate the income and expenses resulting from new sources of income.

Follow the reporting deadlines to the IRS and your state, county, and local municipalities, if applicable.

Dr. Frederick J. Herzog is Founder and Executive Director of the NonProfit Resource Center in Citrus County. He can be reached by email: [email protected] or by phone at 847-899-9000. Visit the website at thenonprofitresource