Non-profit organizations are corporations that concentrate on fulfilling a public purpose rather than on making money. The purpose can be a charitable, scientific, educational, religious, or literary. A non-profit can apply to be tax-exempt as long as it can show it is primarily working to fulfill one of these public purposes.
However, the term “non-profit” is a sort of misnomer in that a non-profit organization can make profits. The non-profit must use its extra income to either pay off additional expenses or towards the public purpose it is trying to accomplish. In order for the non-profit to retain its tax exempt status, it cannot just give the extra money to the officers of the organization as some sort of “bonus.”
Whether the profits themselves are taxable depends on how the profits were made. If the extra income was gained from an activity that is closely related to the non-profit’s public purpose, it remains tax-exempt. However, if the profit was made from an activity that is not related to the purpose of the non-profit, any extra income may be taxed by the federal government.
What Are “Related” and “Non-related” Activities?
Any profit that is made from an activity related to the purpose of the non-profit group is considered to be tax exempt. For example, a non-profit is working towards the promotion of science education or some field of science. The non-profit might decide to put on a science fair and charge visitors admission fees. If the organization should happen to make a profit as a result of this event, that money would be tax exempt because the fair furthered the purpose of promoting science.
If the non-profit organization engages in an activity unrelated to their public purpose and ends up making a profit from it, that profit could be taxable. If the same group promoting science decided to sell lab equipment to major pharmaceutical companies and made extra income, the profit may be taxable. This is not an activity that directly promotes science education.
NOTE: While it is perfectly acceptable for a non-profit to make money from a non-related activity, the organization should not have to devote a lot of resources to this activity and should not be earning much more from this activity than from its related activities. If a non-profit begins to shift focus on a non-related activity more than its related activities and working towards its public purpose, the organization could have its non-profit status revoked by the federal government.
Should I Consult an Attorney when Trying to Form a Non-profit Organization and Determining What its Activities Will Be?
Formation of non-profit corporations as well as getting tax-exempt status from the federal government can be quite complex. You may want to consult a tax attorney to help you understand these laws and walk you through the steps of forming a non-profit group, and what you have to do to get tax exempt status.