Not sexy or fun, but you’d be smart to know
Just because you have received an exemption from federal income taxes as a nonprofit doesn’t mean the tax man don’t cometh. Nonprofit organizations do not have to pay taxes on income they generate, but there is a big BUT here…some of the ways you may be using to bring in money does require a tax payment to the IRS or your state. It goes by the simple name of UBIT, but the sounds are right on: this can bite you.
UBIT =unrelated business income tax.
This is an income tax concept, which is different than a sales tax model. For example, if a California based organization generates UBIT income from a regular activity that is substantially outside of its regular purpose, then it would generally be subject to federal and California income tax on that UBIT income.
On the other hand, sales taxes are due when goods are sold and the organization is responsible to pay the sales tax on the sale of tangible personal property (TPP).
In other words, unrelated business income ( UBIT) is the profit derived from any trade or business activity that is performed on a regular basis by an exempt entity ( a 501c3 tax exempt nonprofit) that is not substantially related to the delivery of the mission of the organization.
For example, if your nonprofit engages in a one-time profitable, unrelated activity, such as an art show or gala dinner event, it generally will not be liable for the UBIT because the activity is not conducted on a frequent and/or ongoing basis. This is true even though the activity is unrelated to the exempt purpose of the organization. If, however, the activity/business/fundraiser is performed on a recurring basis and is unrelated, then your organization will be subject to business taxes. If your site maintains a shopping cart and sells items that are unrelated to your mission, those sales could be taxable.
Tough News, Sorry
In California, sales taxes apply to the sale of any tangible personal property unless a specific exclusion or exemption applies. The tough news is that there is no general exemption for nonprofits or religious organizations; everyone has to pay their share.
What is taxable from a nonprofit sale?
- Sales of food and beverages, under several possible scenarios including luncheons, dinners, events.
- Sales of tickets to events that will offer food and beverages or other physical items.
- Sales of books, pamphlets, brochures and similar literature.
- Sales of items at fundraisers, rummage sales or community events.
- Sales of merchandise at live and silent auctions.
- Sales of tickets where a prize is guaranteed to everyone who buys a ticket.
Sheesh, that sounds like everything, what ISN’T taxable?
- The gift of merchandise as a true donation: the amount or value of merchandise that you get without the donor expecting to receive any merchandise of similar value in return.
- Sales of tickets for concerts, events or show where food and beverage are NOT included in the ticket price.
- Sales of tickets for games or raffles when a prize is NOT guaranteed to everyone who buys a ticket.
- Sales of gift cards, coupons or gift certificates.
- Sales of guide services, rentals, travel, or other items that are not physical products.
- Sale of advertising or marketing that does not include any exchange of goods or services.
How Do I Know If Something Is Unrelated?
As a rule of thumb, if you sell thing to raise funds that is not directly related to the work your organization does, it will be taxable.
- If you open thrift store to sell donated goods on behalf of your animal shelter, the sales will be taxable.
- If a nonprofit university runs a pizza parlor that sells pizza to students and non-students alike: the pizza parlor generates unrelated business income. The tuition and fees generated by the school are tax exempt; its income from the pizza parlor is not tax-exempt because the pizza parlor is unrelated to the university’s education mission and purpose.
- If you have a one-time book sale for your nonprofit that teaches reading skills to kids and adults, those sales would not be subject to UBIT as the event is not ongoing and the sale of the books is directly aligned with its mission.
What If I Don’t File?
So many nonprofit managers have so many plates spinning, it can be easy to ‘overlook’ the obligation to do another set of paperwork, more financial planning and budgeting; the temptation to just not bother can seem quite attractive. But don’t do it!
Sure you probably can get away with it a few times, but sooner or later you will have to account for not only the income, but that taxes owed. By the time that happens, though, the penalties and aggravation will more than wipe out any advantage you may have thought you would gain by skipping this part.
What’s the bottom line?
As a nonprofit, you still have obligations to pay taxes; if you sell stuff to raise funds, pay attention to what you offer, how it aligns with your mission and purpose.
If it is unrelated to your specific mission, you will owe UBIT payments, even if you use those funds to support your organization.
Yes, you can pretend you don’t know you have to do this, but it will catch up with you; don’t let your fundraising dollars go towards tax penalties.
Arrrggghhh, we know. Let us help you figure out the best way to manage this necessary but not so fun part of your fundraising work. Call anytime. 310 828 6979.
Need more info from the Pros?
CA Board of Equalization: Obtaining a Seller’s Permit: http://www.boe.ca.gov/pdf/pub73.pdf
CA Board of Equalization: Nonprofit & Sales Tax; http://www.boe.ca.gov/pdf/pub18.pdf
Green, Hasson & Janks: Accounting Services: http://www.greenhassonjanks.com/industries/non-profits-private-foundations
image credit: http://3.bp.blogspot.com/-98D5HT4H3F0/UBlV9y11A5I/AAAAAAAAA2c/tbEUHWy1X2E/s1600/UBIT.png