Diversifying Your Nonprofit’s Income Stream

Our local church, senior center and animal shelter all operate thrift shops on premises. How is that possible when a second hand shop seems unrelated to the mission they received tax exemption for?

Today’s nonprofit leaders are stretching each dollar that comes in and looking harder for each of those dollars to bring in. Traditional ‘unearned’ (Try to tell a grant writer or development director they didn’t ‘earn’ those dollars!) income streams – grants, individual and business donations, special events – may not be enough in this economy .

Creating earned income streams has always been a hot topic in our nonprofit sector. The debate seems to be around whether it dilutes or pulls focus away from the core mission of an organization, and, more broadly, whether nonprofits should be modeled off of their for-profit business counterparts.

There are many possible advantages to setting up earned income streams:

• Less dependence on traditional fund-raising, resulting in longer term sustainability (The pro-earned income side even coined the term ‘dependency’ for organizations that use the traditional fund-raising-focused income approach);
• Aside from just being money donors, your supporters can now get something tangible and/or of value from their investment;
• A way to differentiate from competitors;
• There may be new types of investors willing to get involved in this new type of venture.

Here are a few things to consider in setting up your earned income stream:

• Earned income vs. unrelated business income:
• Earned income is any direct exchange of product, service or privilege for monetary value. Examples are fees for program services, event tickets, property rentals and membership dues.
• Unrelated business income is a form of earned income that falls outside of the mission for which the organization received tax-exempt status.
• It is not necessarily wrong to pursue an income stream unrelated to your mission. Do consider your organization’s values before proceeding though; a substance abuse program probably shouldn’t start a home-brewed beer operation.
• Taxes: Unrelated business income (UBI) is taxable at the same rates as for-profit enterprise. If you generate $1,000 or more in UBI, the business is required to file form 990-T. And be careful: If your UBI becomes substantial compared to your exempt purpose activity, your 501c3 status could be threatened.
• But wait! It may not be taxable after all! Some UBI that the IRS does not tax include:

o If the work involved is unpaid, it may not be taxed. An example is a volunteer operated bake sale.

o If the work is carried on for the convenience of its members, students, patients, officers, or employees, it may not be taxed. An example is a cafeteria or book store.

o If the business consists of selling merchandise, substantially all of which the organization received as gifts or contributions, it may not be taxed. That is where the thrift shops mentioned above fit it.

• If you are going to model an income stream off of the for-profit world, think that way in your planning: Make sure you can be competitive in the venture since the bottom line takes importance; learn who the customer is (we are good at that as nonprofits!); write a business plan; make sure everyone is on board with the plan and their roles in carrying it out.
• You may be able to find donors to help you get started! More information in this article from the Social Enterprise Alliance
• Double bottom line is one of many buzzwords around the topic, meaning ‘the simultaneous pursuit of financial and social returns on investment’. Add in the environment and, you guessed it, it becomes a triple bottom line.

Here are some mission-related earned income initiatives to get your creative juices flowing:

• International Partners in Mission in Ohio offers immersion trips to their project partner locations for donors.
• Ripple Effect in Maine utilizes their Cow Island retreat during the off season by offering corporate leadership retreats.
• Essence of Art in New Hampshire employs people with mental disabilities who create sellable art.
• Habitat for Humanity’s restores have been popping up everywhere

Feel free to send along other great income-earning ideas you have seen in motion out there and we will post them!

For more information: An earned income stream is one form of so-called social enterprise, which is defined as a venture that achieves its primary social or environmental mission using business methods. Social enterprise has its own professional organizations (here and here), magazines (here and here) and international conferences (here and here).