When a nonprofit organization derives earnings from a trade or home business that is “regularly carried on” and is not “substantially related” for the overall performance by the nonprofit to its exempt goal or function, that earnings could possibly probably be classified by the Internal Income Service (IRS) as unrelated business income. (Consider the section “Testing for unrelated income” for an explanation on how the IRS determines what’s regarded unrelated business income.)
Nonprofits which have $1,000 or even more in unrelated home business taxable earnings ought to file IRS Form 990-T and spend taxes on this sort of earnings. You could possibly be asking oneself the query “Why can not the government just leave these good nonprofit organizations alone?” The effortless answer is this: When nonprofits get started competing with for-profit organizations, consumers get a sour view that the exempt organization could possibly not be acting to fulfill its mission or achieve its tax-exempt goal, but might possibly as an alternative be applying its exemption to shelter earnings that would otherwise be taxable.
It is not fair then, from a fiscal policy standpoint, to offer nonprofits a zero cost tax ride on their unrelated business income so they're able to compete together with the for profit corporations. The nonexempt vendor would suffer unfair competitors - and that is if it could keep in home business at all.
By way of example, give some thought to this commercially unfair instance: Suppose your neighborhood fast-food vendor is charging sales tax and promoting food with adequate of a margin to cover its personal 34-percent earnings taxes. Now consider what would come about if a neighborhood church place up a tax-exempt fast-food stand supplying the similar menu at a 34-percent discount reflecting its lower (nontaxable) operating charges. Does not sound also fair, does it? This can be one particular purpose that the IRS requires a tricky appear in the relationship of a nonprofit organization’s earnings relative to its tax-exempt goal.
