By Jean Kruse/Guest Column
The success of any nonprofit organization is in large part due to the entrepreneurial vision of the leader, the staff and the board.
Encouraging the entrepreneurial spirit and establishing it within nonprofits involves several considerations for leadership, such as:
- Determining the areas within the nonprofit organization that are weak and in need of improvement
- Identifying the expertise needed to shore up those weak areas and enlisting key players who have that expertise and are willing to share it
- Making sure the organization’s culture and operations encourage an entrepreneurial spirit
- Seeking out management and staff with creativity, vision and drive. Be sure to include these skill sets in job descriptions and build incentives to reward entrepreneurship.
- Designing model programs or services that can be replicated and implemented in more than one marketplace
- Treating employees, volunteers and clients as customers who have a choice of who they want to serve them
- Creating transferable systems and efficiencies that are user-friendly to both internal and external customers
- Instituting a process for continuous two-way communication between the organization and the community
How then can a nonprofit have entrepreneurial spirit without getting into trouble with the IRS for having unrelated business income (UBI)?
UBI can cause lots of problems for a nonprofit; it can cost you money and it may even cost your tax exempt status if not properly handled. As described in IRS regulations and publications, unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function – even though the nonprofit uses the profits for its exempt purpose.
A better explanation of UBI is money generated from any ongoing activity when the activity itself does not directly further the organization’s exempt purpose.
An example of income that is not considered UBI is a community performing arts organization that charges admission to its productions. The stated purpose of the nonprofit is to promote the performing arts to the community and to teach performance art to the participants. The organization conducts plays and charges a fee for each attendee. It is regularly scheduled, so it is an ongoing activity. It is also directly related to the purpose of the organization.
An example of an activity that would be UBI is that of a church that owned a vacant lot; they determined that the empty lot would be a great location for a convenience store and gas station. The store provides a much needed cash infusion to supplement the charitable programs of the church. However, this activity is not directly related to the purpose of the church so the income is UBI. This activity could cause the church to lose its local real estate tax exemption, even if properly handled for federal income tax purposes.
IRS Publication 598 explains which deductions can be taken to reduce the profit of the UBI and the types of income that are not considered to be UBI. For example, dividends, interest, annuities and other investment income are not UBI.
Nonprofits can, of course, have UBI — it is not illegal. The problem is that if a nonprofit has UBI with gross income of $1,000 or more, it must pay corporate income tax on the profit of the UBI. Avoid UBI if possible. Federal law generally limits UBI to 30 percent of total organizational income in order to maintain tax exempt status.
It makes sense that the laws make it difficult for nonprofits to have unrelated business income because their trade or business may be competing with a business that is for profit; the organization will then have an unfair advantage since they do not have to pay tax.
Another threat to the survival of nonprofits is the absence of a “bottom line” as a key performance indicator. Well-managed nonprofit organizations are numerous. However, the people who manage them tend to be zealous leaders within their fields whose experience is based on the organization’s mission rather than on management. As a result, organizations often lack a fundamental knowledge of management, planning, accounting and finance.
Contact SCORE at www.scorecr.org if you want an experienced mentor for either your nonprofit, your for-profit entity, or if you are thinking about starting one or the other.
