Income from business not related to the mission of U.S. nonprofits grew to $1.4 billion in 1997, up 18 percent from a year earlier, the Internal Revenue Service says in a new report.
Nonprofits in 1997 faced an unrelated business income tax liability of $418.7 million on taxable profits, up 12 percent from 1996, the IRS says.
The rate of growth in unrelated business income, however, fell from 31 percent in 1996 and 39 percent in 1995.
Within limits, nonprofits can generate income from unrelated business activities, the IRS says, but the income those activities produce can be taxed if the activities are “regularly carried on” and “not substantially related” to the nonprofit’s tax-exempt purpose.
But nonprofits can avoid paying unrelated business income taxes if, for example, volunteers do most of the unrelated business work, or if the nonprofit sell merchandise it received as a gift or contribution, or operates games of chance.