HelpNet USA

If an organization is selling goods or services to generate income, even if it is conducting the activity within a larger group of activities related to its exempt purpose, the activity is a trade or business. It is important that you file the correct return and pay taxes on this income.

Sales of merchandise, publications, and other media can generate UBI if the items sold are not substantially related to the organization’s exempt purposes. If the items do have a substantial relationship, then the sales do not generate UBI, but their relationship to the exempt purpose must be clearly identifiable.

For example, the sale of educational videos or publication subscriptions by an animal welfare group would be substantially related if the content of those videos or publications promotes the organization’s exempt purpose. If the same animal welfare group sold pet accessories and apparel, the sale of these items would generate unrelated business income.

Exceptions and Exclusions

• Volunteer Labor: Any trade or business is excluded in which substantially all the work is performed for the organization without compensation. Some fundraising activities, such as volunteer operated bake sales, may meet this exception.
• Convenience of Members: Any trade or business is excluded that is carried on by an organization described in section 501(c)(3) or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this is a school cafeteria.
• Selling Donated Merchandise: Any trade or business is excluded that consists of selling merchandise, substantially all of which the organization received as gifts or contributions. Many thrift shop operations of exempt organizations would meet this exception.

If you have questions or concerns about whether your planned activity may generate UBI and thus subject you to taxation and/or jeopardize your tax exempt status, you may want to seek with a nonprofit expert.

For many small startup nonprofits, learning the ins and outs of nonprofit operations, especially as an organization exempt under IRC 501(c)(3), can be overwhelming. However, it may be best to first begin to acquire knowledge of what activities have the potential of jeopardizing the exempt status that you have worked so diligently to achieve. Four primary types of activities exist that may result in revocation of an organizatio’’s tax exempt status: Private Inurement, Lobbying, Political Campaign Intervention, and Unrelated Business Income.

Private benefit/inurement

The prohibition of inurement to insiders is absolute. Any amount of inurement is grounds for loss of tax-exempt status. In addition, the insider involved may be subject to excise tax.
In contrast, if the activities of an organization privately benefit someone who is not an insider, that benefit must be substantial in order to jeopardize the organization’s tax-exempt status.

Lobbying

Lobbying is activity designed to influence legislation. A 501(c)(3) is attempting to influence legislation if it contacts, or urges the public to contact, a member or employee of a legislative body to propose, support, or oppose legislation, or if the 501(c)(3) advocates or opposes legislation.

Political campaign activity

501(c)(3)s are prohibited from engaging in any “political campaign activity”—that is, directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office. This includes making contributions to political campaign funds or making public statements for or against the candidate. The prohibition of political campaign activity is absolute.

Activities generating excessive unrelated business income (UBI)

UBI is income from a regularly-carried-on trade or business that is not substantially related to the organization’s exempt purpose.

If you have any concerns as to whether or not your ongoing or planned activities may place your organization’’s tax privileges in jeopardy, I”m here to help.

While your Board of Directors should consist of a highly competent and skilled cross-section of the community you serve, most organizations, especially small startup nonprofits, will encounter the need to hire a consultant from time to time to assist either board members or staff members with their respective duties. Even if board members could do the specified job well, the politics of some situations or the lack of time to focus on the task may suggest the need for a consultant. To avoid conflicts of interest, employ an outside expert as a consultant rather than an individual who has been elected to serve on the board of directors.

Many attorneys, accountants, and other professionals specialize in the nonprofit sector. These individuals possess specialized skills, experience, and networking contacts gained from working with other nonprofit organizations. More importantly, these individuals will be objective, outside observers without any personal interests in the organization. This enables them to provide unbiased feedback and a new perspective on the issue at hand.

Common tasks for which to seek the assistance of an outside consultant include:

• Program Development Assistance
• Assistance with State and Federal Compliance
• Board Development and Training
• Organizational Governance
• Fund Development
• Cash Management
• Program Evaluation
• Executive Leadership
• Mission-based Marketing
• Volunteer Coordination
• Strategic Planning Recommendations

In America, volunteers and volunteer organizations are a way of life. Volunteers give their time, talents, and treasures in many ways. Parents frequently volunteer to help at their child’s school, with extracurricular activities, or church groups. Children learn about volunteering from their parents, their teachers, and their peers as many public, private, and parochial schools require service of the students to foster civic responsibility. Young adults become involved in organizations to support their beliefs, such as ecology, literacy, or poverty reduction.

Whether yours is a startup nonprofit who is operating solely with the use of volunteers or an established entity with a paid staff who are complimented by volunteers, it is important that you view your volunteers as a valuable resource- a resource that requires maintenance and management. Volunteers as a resource can save the organization money and increase cost-effectiveness, while they expand the organization’s capabilities, improve the quality of service, and improve community relations. However, these advantages require a significant investment and commitment by the organization in time, money, and staffing.

In order to create a successful volunteer program, an organization must practice diligent volunteer management through the establishment of policies and procedures for the program. When creating your organization’s volunteer management program, remember to address the following policies:

• Recruiting volunteers
• Interviewing and screening for placing volunteers
• Orientation and training of volunteers
• Supervising and evaluating volunteers
• Retaining and recognizing volunteers
• Maintaining the records of the program
• Writing program reports
• Evaluating the program
• Advocating and educating the staff on the important roles of volunteers

While this may seem like a lot to undertake, it all comes down to what I think are the two most essential elements: recruitment and retention. More on that to come…