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Receipt for services rendered for non-profit organizations

without a doubt one of the most misunderstood issues with nonprofits is the issue of selling stuff can a non-profit sell goods and services well the short answer is yes but you're going to want to stick around after the intro to hear the details on this because trust me the details matter [Music] hi I'm Greg McRae founder and CEO of foundation group and welcome back to our 501c3 University Channel where we strive to make non-profit issues understandable so you want your non-profit to be able to sell goods or services but you're not sure if you can or maybe you think you can but you don't know the ramifications of doing that well we won't have time in this video to cover every potential angle but for the next few minutes I'm going to unpack the bigger issues of sales inside a non-profit let's get started and just to give you a preview of our main topics I'm going to be talking specifically about program Revenue the commerciality doctrine and unrelated business income in that order now we've touched on some of this in our earlier video on unrelated business income so be sure and check out that one if you haven't seen it already so program Revenue program revenue is defined as income generated by a non-profit through the sales of goods or services the sale of which directly furthers the exempt purpose of the organization the part of the this definition I want to highlight is the section that says directly furthers the exempt purpose of the organization this this if the sales activity that is generating the revenue doesn't directly further the exempt purpose well then it isn't program revenue and we'll talk in a minute about what it might be instead directly furthers means exactly what it says to some extent your nonprofit's charitable mission is being furthered directly by the sale of the goods or services in question so what does that look like well some examples include private school charging tuition to students 501c3 Community Theater selling tickets to Productions or maybe a youth baseball team charging a participation fee in all three of these scenarios the fees paid are directly related to the charitable program making the money generated by the activity satisfy the definition of program Revenue so what's the big deal about program Revenue well for one thing program Revenue isn't taxable and even though it's a business activity of sorts it escapes the classification of commercial activity which we'll talk about next program Revenue also helps public charity 501c3 satisfy the public support test though you don't often see this some Charities exist solely on program revenue and have virtually no donations given to them so program Revenue it's a good thing our next topic is the commerciality doctrine this so-called Doctrine wasn't established by the IRS but rather by the courts but the IRS does use it to make Revenue determinations the commerciality doctrine looks at whether a non-profit organization is operating in a manner that is too commercial to be operating primarily in furtherance of an exempt purpose of some of the factors considered include adopting profit maximizing pricing Marketing in a commercial manner generating unreasonable profit margins and selling to the general public instead of a specific Target group the main problem with the commerciality doctrine is that it is highly subjective and not something originally written into the tax code and there are two ways this can be an issue one way is for clearly program Revenue related activity to become commercial in nature due to some of of the factors I listed maybe instead of reasonable tuition fees a private school starts charging four times what other area schools are charging but even then it is really subjective maybe the average class size is only five students and the teachers all have phds however the truth is that program Revenue becoming too commercialized that's not usually how this issue comes up the primary way this comes up is when a non-profits proposed program is just too similar to existing commercial models we hear thousands of new non-profit proposals from potential clients every year and this issue comes up a lot some people are under the idea that if they restrict their customer base to only a charitable class or maybe other non-profits than their otherwise commercial business idea well it can be a non-profit they'll even charge below Market rates unfortunately that's not enough an example of this happened recently a potential client was talking with one of our sales reps and this person was proposing to start a non-profit that would provide professional Video Production Services but only for churches they even proposed to provide the Production Services for about 25 percent less than what other area video production companies charge and they were quite disappointed to learn that their idea would run afoul of the commerciality doctrine churches as 501c3 organizations are potentially a charitable class however video production isn't a charitable activity it's just an ordinary run-of-the-mill business operation with dozens of competing businesses in any sizable City the pushback from the potential client was that they were satisfying a charitable purpose by helping churches spread their message via video that however is what we around here call Mission by extension in other words it's indirect benefit it is impossible for the video production company to adequately satisfy the charitable purpose requirement when their production activity doesn't directly affect charitable outcomes our third topic is unrelated business income I mentioned this before but I highly recommend you go check out our complete video on that topic we'll just hit the highlights here unrelated business income is revenue generated by the ongoing sale of goods and services by a non-profit organization that does not directly further the exempt purpose of that organization in other words if the activity violates the principles of the commerciality doctrine then at best the revenue becomes unrelated business income and therefore is subject to tax now that's not a complete deal breaker unless of course unrelated business income reaches an amount relative to your overall income that the IRS determines that you're no longer exclusively about a charitable purpose it's bad in that case your non-profit could lose its 501c3 status there are exceptions and that mostly revolves around short-term fundraising some commercial looking activity like Girl Scout cookies for example because it only happens for a short period of time each year that's not Ubi but is considered fundraising Revenue again go watch the unrelated business income video to get more on that subject well I hope this discussion about selling goods and services has helped you understand the issue better thanks for watching now go serve your community hey do me a favor and don't navigate away just yet we would really appreciate it if you would hit the like button below as it really helps get our content recommended to more people subscribe if you haven't already as we have great content coming your way on a regular basis finally you can click the little bell icon to be notified of new content when we post it to learn more about Foundation group you can visit us on the web at .501c3.org thanks and we'll see you next time [Music] thank you [Music]