Unrelated business activities in non-profit organizations in Illinois

Unrelated business activities in non-profit organizations in Illinois

On Behalf of | Dec 22, 2022 | Non-Profit Organizations

Every business has two primary missions: provide a product or service in line with its mission statement and generate revenue with minimal liability. A specific type of entity—the nonprofit—remains exempt from taxes and comprises an entire section of the tax code. While exempt from taxes, any one of the nonprofits described (most appear in section 501(c) must pay tax on income earned from activities classified as “unrelated.”

As applied to most organizations, an activity “unrelated” to business satisfies the following three requirements:

  1. It is a trade or business
  2. It is regularly conducted
  3. It is not related to advancing the exempt status of the organization

Specific activities excluded from the definition of “unrelated” include:

  • Volunteer Labor: Any trade or business in which most or all work performed for the organization pays no compensation. Examples include fundraising operations, such as bake sales.
  • Convenience of Members: Any trade or business conducted by an organization described in 501(c)(3) or government college or university for the convenience of members. An example would be a school cafeteria.
  • Selling Donated Merchandise: Any trade or business(for example, a thrift store), which sells merchandise that that business; that merchandise was originally given as gifts or contributions from another organization.

Many other exclusions and exemptions apply to this general definition. For example, dividends, interest and certain investment income are excluded from the calculation. Additionally, royalties, certain rental income and gains or losses from the transfer of property fall outside of the definition. Any exempt organization that makes $1,000 gross income or more from another business must file IRS Form-990.

Experience matters

Non-profit entities operate under a specific set of rules. Compliance with these rules ensures that the entity maintains that legal status. Attorneys familiar with the specific obligations that are owed when identifying unrelated business income can offer guidance.