If the business arm of a nonprofit organization only serves as a source of revenue and does not further the NPO’s mission, it will be subject to something called the Unrelated Business Income tax.
The Unrelated Business Income Tax applies to or feeder businesses that have become successful but are not related to the mission of the original NPO. Because all proceeds from a feeder business must remain in the business, if an NPO cannot find a use for any extra capital received from the feeder business by the end of a fiscal year or quarter, it may become taxable income.
If an organization owes taxes in excess of 500 dollars a year on feeder business income, it will have to file Form 990T and pay a quarterly tax. However, a consulting professional who specializes in tax code will likely be able to assist a nonprofit in finding one of the many loopholes that allow NPOs to avoid this Unrelated Business Income Tax. Additionally, nonprofits with realistic expectations of likely feeder business profits and donations can incorporate these figures into a budget and avoid taxes through efficient use of received capital.
