As a not-for-profit leader, you’re passionate about your mission. You’re changing lives, improving communities, and making the world a better place. But here’s a curveball you might not have seen coming – when it comes to taxes, your not-for-profit might have more in common with for-profit businesses than you think.
The Myth of Blanket Tax Exemption
Let’s bust a common myth right off the bat: being a not-for-profit doesn’t automatically shield you from all taxes. Surprised? You’re not alone. Many not-for-profit leaders assume their tax-exempt status is a catch-all protection. But the reality is a bit more complex, especially when it comes to sales and use tax, and something called Unrelated Business Income Tax (UBIT).
Why It Matters
Imagine this scenario: Your not-for-profit has been humming along for years, focusing on your mission and assuming you’re in the clear tax-wise. Then, out of the blue, you get a notice from the IRS or your state tax authority. Suddenly, you’re facing unexpected tax bills, penalties, or even a threat to your tax-exempt status.
Sounds like a nightmare, right? That’s why understanding these tax nuances is crucial for protecting the organization you’ve worked so hard to build.
The Sales Tax Surprise
Here’s something that catches many not-for-profits off guard: depending on your state, you might still be on the hook for sales tax. Most states give at least some sales tax exemption on things a not-for-profit buys (after all the tax is on you) but very rarely on things a not-for-profit sells (after all, the tax is on your customers, who generally aren’t non-profit entities).
For example, let’s say your environmental not-for-profit starts selling trendy reusable water bottles to raise funds. Great idea, right? Absolutely! But in many states, those sales could be subject to sales tax.
The UBIT Plot Twist
Now, let’s talk about UBIT – the acronym that can make not-for-profit accountants break out in a cold sweat. UBIT stands for Unrelated Business Income Tax, and it’s the government’s way of leveling the playing field when not-for-profits compete with for-profit businesses.
Here’s the deal: if your not-for-profit engages in activities that aren’t substantially related to your exempt purpose, that income might be taxable. And if these activities become a significant part of what you do, you could even risk your tax-exempt status.
Let’s say you’re a not-for-profit theater company. Your ticket sales for performances? Those align with your mission and are generally exempt. But what if you start renting out your space for corporate events or running a full-service restaurant in your lobby? That’s where UBIT might come into play.
Keys for Success
Now, don’t panic! Understanding these tax implications doesn’t mean you need to shy away from innovative fundraising or revenue-generating activities. It just means you need to be smart. Here are a few tips:
- Know Your Mission: Always tie your activities back to your core purpose. The closer the connection, the safer you are tax-wise and the more likely those purchases will be shielded from sales tax.
- Separate Unrelated Activities: Consider creating a for-profit subsidiary for activities that might trigger UBIT. It’s a way to protect your not-for-profit status while still pursuing those revenue streams.
- Leverage Exclusions: Some income, like qualified sponsorships or royalties, might be exempt from UBIT if structured correctly.
- For things you sell, assume you have no exemption: Sales tax is on your customers, not you, so the incentives states have for you in this area usually don’t apply to things you sell to others.
- Stay Informed: Tax laws change, and they vary by state. Regular check-ins with tax professionals can keep you ahead of the curve.
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The Bottom Line
Understanding these tax nuances isn’t just about avoiding problems – it’s about empowering your not-for-profit to thrive. When you’re savvy about tax implications, you can make informed decisions about fundraising, revenue generation, and growth strategies. You can confidently explore new opportunities without fear of unintended consequences.
Being a successful not-for-profit leader in today’s world means wearing many hats – and one of those hats needs to be “tax strategist.” Or at least hiring one. It is critical for ensuring your organization can continue its important work for years to come.
Where We Come In
Don’t let tax surprises derail your mission. Stay informed, stay smart, and when in doubt, don’t hesitate to reach out to tax professionals at Rea, who specialize in not-for-profit services. Your cause is too important to leave to chance.
Ready to dive deeper into the world of not-for-profit tax solutions? Our team of experienced advisors is here to help. Let’s work together to keep your organization financially healthy and mission focused.
By Adam Schultz (Avon)