When it comes to raising money to keep your nonprofit going, there are many revenue streams to consider. Individual donations, major gifts, grants from foundations, corporate gifts and sponsorships, galas and events, earned income – if you work in the fundraising world, you’ve probably at least heard of these fundraising models if not actually explored how they might work for your organization.
But are you aware of the tax and legal issues involved in some of these fundraising models?
Our friends at Pro Bono Partnership of Atlanta (PBP) presented a great class on that topic here in our Atlanta center a few weeks ago. We wanted to share a bit of what they taught us. As always, this is general information and should not be construed as legal advice.
The class started with a quick refresher from Fundraising 101 which covers the basics of charitable contributions and solicitation. You can check out a recording from PBPA talking about how to register to solicit donations in Georgia and other states, how to acknowledge donations, and what paperwork to keep.
From there, we looked at the tax issues you should consider when evaluating various fundraising models.
Unrelated Business Income (UBI)
This is income derived from trade or business activities not substantially related to the tax-exempt organization’s purposes. It is taxable as if earned by a comparable for-profit enterprise. While nonprofits can have some UBI, having too much can result in the loss of your tax-exempt status.
How do you know if your earned income is UBI?
- It’s a trade or business, meaning an activity carried on for production of income from sale of goods or services. Example: Your nonprofit sells holiday greeting cards during the holiday season.
- It’s regularly carried on, meaning you do it with regularity and continuity in the same way a comparable commercial company does. Example: Only selling holiday greeting cards during the holiday season may not seem “regularly carried on” but all greeting card companies only sell them during the holiday season.
- It’s not substantially related to the mission of your organization. The mere fact that the income produced will be used to carry out the mission doesn’t count here. Example: Selling greeting cards has nothing to do with the mission of preventing childhood obesity.
If your earned income meets all three of these definitions, it is considered UBI. Some modifications come into play when work is done by volunteers, products being sold are donated, rent is collected, the income is passive, etc. If any one of the three does not apply, most likely it is not UBI.
For more information on UBI, check out this webcast from PBPA.
When considering the sale of items as a revenue stream for your nonprofit, there are a few things to keep in mind regarding sales tax.
- Regulations vary by state.
- In Georgia, most nonprofits are not exempt from paying sales tax on items they purchase.
- If the item is taxable and the purchaser is not exempt from sales tax, you must collect and remit sales tax.
- Be aware when selling online that sales tax is calculated based on the purchaser’s location, not your organization’s. You’ll need to ensure you’re collecting and remitting the correct amount from counties and states outside of yours.
View a PBPA webcast on sales tax for more information.
Now that you’re aware of the tax issues to consider, let’s take a look at a few fundraising models and the questions you should ask before using them for your nonprofit.
- What is being sold? Donated items? Items related to your mission?
- Who is doing the selling? Volunteers? Participants in a training program? Paid staff?
- Who is doing the purchasing? People in your city? People in your state?
- What services are provided and by whom? Are they related to your mission?
- Are you renting property you own outright or space that’s debt financed?
- Do your rental agreements include services beyond use of the space and custodial work?
In this model, the charity licenses its name and logo to a for-profit company for a fee to promote the sale of the for-profit company’s products or services. Example: Your nonprofit allows a local popsicle company to add your logo to its popsicle wrappers. They advertise saying a portion of the price of these special popsicles will go back to the charity.
You’ll need to make sure the contract between your organization and the company spells out the amount being paid in royalties for use of the name and logo, how much of the proceeds will be donated, and how long the promotion will last. As long as your organization isn’t doing any regular marketing of the company’s product, the income remains passive and wouldn’t meet the requirements to become UBI.
Is your acknowledgment of the sponsor limited to displaying their name and logo? Any language endorsing the company’s products becomes advertising which is UBI.
Does the value any goods and services your organization provides in return amount to less than 2% of the total sponsorship payment? If the value exceeds 2%, it can be considered a “substantial return benefit” which reduces the value of the sponsorship.
Are all donations made directly to your nonprofit even if collected by volunteers?
Gambling is illegal in the state of Georgia, so casino nights and poker tournaments are not an option unless participants are either given fake money at no cost to them or don’t win a prize. Raffles require a license; make sure you have one in place.
Galas & Other Events
Silent auctions. Dinners. Wine tastings. Performances.
- Are items being purchased during the event? How will sales tax be calculated, collected, and remitted?
- Can any portion of the ticket purchase be considered a donation? If so, are we acknowledging it correctly?
Golf Tournaments & Fun Runs
- Can any portion of the entry fee be considered a donation? If so, are we acknowledging it correctly?
- How are we setting up our sponsorship levels? Does the value of anything we’re giving the sponsor stay below the 2% threshold? Does our acknowledgment of our sponsors stay out of advertisement territory?
There’s more information on Contests and Sweepstakes on PBP’s website.
This is just a high level look at various fundraising models and the tax and legal issues that come along with them. Be sure to consult with a lawyer before beginning any fundraising venture to ensure you’ve covered all your bases.