Earned income refers to revenue that a nonprofit generates through services provided or goods sold, rather than through charitable contributions, grants, or fundraising. While donations are freely given to support a mission, earned income is the result of a transaction.
This form of income can take many shapes, from selling educational materials to offering training workshops or renting out facilities. But what makes it “earned” isn’t just the exchange of money, it’s the business-like nature of the transaction and whether it supports your mission.
When evaluating this source of revenue, here’s what you need to consider:
Understanding what qualifies as earned income for nonprofits is the first step in avoiding tax headaches down the road.
Earned income can be helpful in diversifying your nonprofit’s revenue and supporting long-term sustainability. But not every organization realizes just how many ways there are to bring in mission-aligned revenue beyond grants and donations. Let’s take a look at several common examples of earned income for nonprofits.
Nonprofits focused on education often develop proprietary resources. Selling workbooks or digital courses can generate income while advancing the organization’s mission. As long as the content supports your core programming, this type of revenue typically qualifies as mission-related.
Whether it’s leadership training for youth or a community wellness seminar, charging a fee for participation can be a source of earned income. These activities are especially beneficial when they serve both your audience and your mission, making them less likely to trigger tax issues.
Organizations with in-house expertise, such as mental health, legal, or consulting services, may offer those services for a fee to individuals, groups, or even other nonprofits. As long as the services are consistent with your exempt purpose, the income is generally considered earned.
If your nonprofit owns a building, a theater, or even specialty equipment, renting it out during off-hours is another way to earn revenue. However, how often you rent it out and who you rent it to can affect whether that income is classified as related or unrelated by the IRS.
From thrift stores to product lines made by program participants, many nonprofits run mission-driven businesses. These ventures blend impact with income, but they need careful structuring to ensure tax compliance, especially if any portion of the activity is unrelated to your core mission.
Adding earned income streams to your nonprofit’s funding mix can be smart, but it also adds complexity. If your organization is exploring new revenue sources, strategic financial guidance from TCCFO can help you stay compliant and sustainable.
While nonprofits are allowed to generate revenue through business activities, certain income can trigger what’s known as Unrelated Business Income Tax (UBIT). Knowing the distinction between related and unrelated income is key to staying compliant and avoiding surprise tax bills.
UBIT applies to income generated from a trade or business that is:
For example, if a youth education nonprofit runs a snack bar at its after-school center, that income is likely related and not taxable. But if it opens a second snack bar in a for-profit office building with no educational purpose, that may count as unrelated business income and be subject to tax.
Income is typically not subject to UBIT if the activity:
In other words, if the business activity supports your nonprofit’s exempt purpose in a meaningful way, the IRS will likely consider it “related” and exempt from UBIT.
Some of the most frequent causes of UBIT include:
Just because your organization can earn income doesn’t mean there are no strings attached. UBIT rules are complex, so it’s important to assess every revenue stream with compliance in mind.
Regardless of whether earned income is taxable, nonprofits must properly report it. That means accurate documentation on your annual nonprofit tax returns, especially Form 990. The IRS requires detailed disclosures about revenue sources, and mistakes can flag your organization for audit.
To protect your exempt status and maintain transparency, be sure to:
Proactive tax planning and diligent recordkeeping are essential for any nonprofit exploring earned income. Staying compliant ensures you can focus on growth and impact.
Note: If your organization does generate unrelated business income, you’ll need to file a separate return using IRS Form 990-T. Additionally, state or local tax filings may be required, depending on where your nonprofit operates. UBIT compliance can involve multiple jurisdictions, so it’s wise to consult a qualified professional.
Earned income can be an excellent way for nonprofits to generate unrestricted funds, reduce dependency on grants, and build long-term financial resilience. But it’s not a one-size-fits-all solution. Without careful planning, it can open the door to mission drift or unexpected tax liabilities.
To determine if earned income is a good fit, ask yourself:
For example, selling branded merchandise, offering consulting services, or renting out space in your facility might all qualify as earned income, but the tax treatment varies depending on how closely they relate to your core mission.
With the right approach, earned income can support your programs and growth goals without sacrificing your nonprofit identity. But it’s crucial to understand the rules and risks before you dive in.
The Charity CFO specializes in helping mission-driven organizations simplify their finances, stay compliant, and build sustainable funding models. From interpreting IRS rules to preparing accurate nonprofit tax returns, we can guide you every step of the way. Contact us today to see how we can support your goals.
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