Earning Income as a Nonprofit Organization

Nonprofit corporations, by definition, exist not to make money but to fulfill one of the purposes recognized by federal law: charitable, educational, scientific or literary. Under state and federal tax laws, however, as long as a nonprofit corporation is organized and operated for a recognized nonprofit purpose and has secured the proper tax exemptions, it can take in more money than it spends to conduct its activities. In other words, it can make a profit. Whether a nonprofit’s income is taxable depends on whether the activities are related to the nonprofit’s purpose.

Making a profit from “related” activities
Tax-exempt nonprofits often make money as a result of their activities and use it to cover expenses. In fact, this income can be essential to an organization’s survival. As long as a nonprofit’s activities are associated with the nonprofit’s purpose, any profit made from them isn’t taxable.

Let’s take as an example a group called Friends of the Library, Inc. It’s a 501(c)(3) nonprofit (which means it has a federal tax exemption), organized to encourage the appreciation of literature and to raise money for the support and improvement of the local public library. It makes a profit from a lecture series featuring famous authors and from an annual sale of donated books.

Because these activities are educational and literary in nature, they do not jeopardize the group’s tax-exempt status, and the proceeds from them are not taxable. The organization may use this income for its own operating expenses (including salaries for officers and staff) or for the benefit of the local library. What it cannot do is distribute any of the income to the nonprofit’s officers, directors or others connected with Friends of the Library.

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