501c3 Entity Selling Retail

[Vicente]

Dear Harvey Mechanic,

We have a 501C3 organization and would like to sell imported goods in a store that would benefit the children and people we support. I know other non-profits such as good will indistries and others have stores. My question is how does that work? We have mainly only taken in donations and now we would be having goods for sale. We have had goods for sale before but only a small portion of the income. So if it becomes much larger how does that effect our 501C3 status? What would change if anything? or should we start a separate entity for the store business?

ANSWER: Goodwill sells donated goods.  Other goods would be called unrelated business.  

IRS Publication 598 "Tax on Unrelated Business Income of Exempt

Organizations" at

www.irs.gov/pub/irs-pdf/p598.pdf

explains that,  if products or services are not directly related to

the charitable, educational, religious or other purpose or function

constituting the basis for its exemption(other than for production

of income), then the activities are generally taxable.

Their exact wording is found in the middle column of page 3

"Unrelated business income is the income from a

trade or business that is regularly carried on by

an exempt organization and that is not substan-

tially related to the performance by the organiza-

tion of its exempt purpose or function, except

that the organization uses the profits derived

from this activity."

The IRS has declared, "Nonprofit organizations that are granted

Federal tax exemption based on their mission-related purposes

are allowed by the IRS, within certain limits, to generate income

from unrelated business activities."

www.irs.gov/pub/irs-soi/97eounrl.pdf on pdf page 1

The organization could, if it has more unrelated activities than

the IRS's vague "certain limit", be jeopardizing its exemption

depending upon the facts and circumstances. Two of the main factors

is the gross income of the activity in relation to the gross income

of the organization's total income and staff time spent on the

activity. Harvey Mechanic, Attorney at Law - [email protected]

---------- FOLLOW-UP ----------

Thanks for your answer. If we are helping children in Africa and the goods we are selling are made by the African people(fair trade) is that really unrelated business? When you say the activities are generally taxable what do you mean? Are you talking about the fact we would have to charge sales tax or are you talking about some other kind of tax? I think that what we want to do is completely related to the charity. When we buy things from the african people, it helps them economically and than in turn we are giving back to them a second time with the money we make from the sales. Please explain why this would be unrelated business if you still think it is. thanks so much for your help!

[Cailin]

Internal Revenue Code section 501(c)(3) which is available at:http://pages.citebite.com/w8p5e1ayxjv has, in part, that the 501(c)(3) organization must be "operated

exclusively for religious, charitable, scientific, testing for

public safety, literary, or educational purposes ... no part of the

net earnings of which inures to the benefit of any private

shareholder or individual".

If the people you are purchasing the products from create the goods and are themselves part of a charitable class(poor people) then your activities may be related to a charitable purpose. Self-help programs are often used to ameliorate the problems of poverty. Supplying materials and services for use in these programs can also be a charitable activity. How the organization operates is usually a critical factor in determining whether it is charitable rather than a commercial venture. For example, in Rev. Rul. 68–16, 1968–1 C.B. 255, an organization created to market the cooking and needlework of needy women was held to be exempt even though it received a small commission on each sale. The organization served a charitable class, and operated in a noncommercial manner. The women it served could not otherwise find an outlet. In addition, the commissions it charged were insufficient to support the organization and it relied on public contributions. www.irs.gov/irm/part7/irm_07-025-003.html#d0e783

If children in Africa are not making the goods, then do not bring children into the discussion. If your operation is not like that in Rev. Rul. 68-16 then you may find that the sales would be taxable.  I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations.  I am, by "taxable", therefore, only referring to federal income taxes. I would be willing to work on your matter, but I would need to spend a substantial amount of time analyzing your whole operation and projected budget items and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below.  

Harvey Mechanic, Attorney at Law - [email protected]