In part two of our reporting series, we want to address how to categorize some of the other types of revenue a nonprofit organization frequently encounters. Donations aren’t the only type of funding with specific reporting requirements. Non-gift revenue sources have to be considered as well.
For many nonprofits, donations are not the only source of revenue. While everyone wants more donors who will give to their organization, there’s plenty of other revenue sources that may need to be accounted for, too.
It’s no secret that 2020 upended the normal operations for some nonprofits. But for those that were resilient, they adapted to the new normal. Whether that’s through virtual events or attendance restrictions to meet city ordinances, nonprofits continued to make a difference through programs, fundraisers, and other events. If you had non-gift revenue, how do you categorize and record those funds in your nonprofit’s books?
Program revenue is the second most common form of nonprofit income after donations. It consists of money received from the sale of goods and services that are directly related to the nonprofit’s exempt purpose. Examples include a private school charging tuition, a community theater charging admission, and a youth baseball league charging a participation fee.
Even though program revenue is similar to income received by a commercial business, it isn’t taxable due to the connection with the mission of the nonprofit. This can be a fine line, however, as some organizations too closely skirt the commerciality line. That’s a topic for another day. Suffice it to say that truly commercial revenue, that is services or product income not directly tied to mission and programs, is called unrelated business income and is subject to tax.
In this category, only include true membership dues paid by “members” of the organization, not fee-for-service revenue. While each nonprofit has its own list of requirements to become a member, membership dues are fairly standard and are often paid by the member monthly, quarterly, or annually to enjoy a particular benefit. For instance, someone who is a member of an organization may receive resources that are only available to members or benefits such as the ability to use the organization’s facilities, like the YMCA.
There are instances where membership doesn’t come with any particular benefit, but rather is a means of having a tighter group of supporters who commit to giving a fixed amount on a regular basis. While this sounds like dues, it really isn’t for revenue categorization purposes. It’s just a highly predictable source of donation income.
Most people understand the concept of rent. In this case, we’re talking about an income stream from the rental of land and/or buildings. Because the renter is receiving something in exchange for their money, rental income is not a gift. But, because it falls under the IRS category of passive income, it’s not considered service revenue either. Rent is its own distinct category of income. Fortunately, because of the IRS treatment of rent as passive, most nonprofit rental income is exempt from unrelated business tax and can be a great source of income to many organizations.
Fundraising revenue is generally event or campaign driven and is another very common form of income for a nonprofit. It is often thought of as another form of donation, and that’s true to a point. However, the IRS looks at fundraising activity as unique from standard ongoing solicitations for donations. Examples of this type of income generation include golf tournaments, fundraising banquets, and Girl Scout cookie sales.
It’s important to keep tight records on each event. The IRS will want to know the amount of revenue, as well as the associated expenses, for each fundraising event separately. If there are multiple types of income from one event, such as sales and non-sales gifts, track these line items separately.
An organization has multiple streams of revenue, all with their own level of accounting complexity. We’ve only just scratched the surface during this reporting series. You work hard to raise the funds you need for your nonprofit organization to operate. However, you must also ensure your record books reflect your efforts accordingly, whether that’s accomplished by you or a professional.
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