Raising Funds and Distinguishing between Program Service Revenue and Unrelated Business Income

Christian Shaeffer Non Profit Exempt Organizations, Uncategorized Leave a Comment

As you consider new and additional ways to fulfill your exempt purpose mission and raise funds for your nonprofit, you may have the opportunity to engage in an activity that is an exchange transaction and generates revenue (think store that sells product or service). If the activity is considered a Program Service, the revenue generated is exempt from income tax. Otherwise it is most likely Unrelated Business Income (UBI) and thus subject to income tax.

According to the IRS, program service revenue is exempt function revenue (related to your mission) and program services are primarily those that form the basis of an organization’s exemption from tax. UBI, on the other hand, is broadly defined and includes almost everything else – UBI is a trade or business that is regularly carried on and not substantially related to furthering your exempt purpose. Fortunately, there are some allowed exclusions to UBI (use of volunteer labor, for the convenience of its members, and selling donated merchandise).

Many nonprofits are able to engage in a trade or business that is substantially related to the exempt purpose and generates revenue that is used to further support the organization. One less obvious example of this might be a homeless shelter that runs a restaurant that is staffed by its residents and is part of the occupational rehabilitation services of the organization. If your nonprofit engages in an activity that you are treating as a program service and it might otherwise be considered UBI, I recommend, in addition to reporting it as such on your annual 990, creating an internal memorandum that documents the activity as a program service and why.

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