DEFINITION
An organization can be purposed to provide on-the-job training programs to individuals to improve their knowledge and capabilities. Job training programs are offered to non-skilled individuals who are unable to find employment or cannot advance from poorly paid employment due to inadequate education.
BEST PRACTICE
Job training programs must be defined, and must have an ending for participants, meaning they graduate from the program at some point. Participants are generally expected to leave the operation once the program has been completed, and seek employment outside of the organization with their new skill set.
Many job training programs are housed within what would otherwise be a commercial endeavor. Ex. Coffee houses, shoe manufacturing company, dairy farm, etc. It is the priority of providing the hands-on training which makes the operation of an otherwise commercial activity qualify for tax exemption. In other words, the reason you exist is to offer the job training.
In Revenue Ruling 73-127, the IRS found that an organization that offered a job training program through a grocery store operation was NOT exempt, as the store operation was conducted on a scale larger than was necessary for the training program.
A job training program can offer a livable wage to program participants while they are in the program. These individuals are not being hired to permanent positions, but as trainees. Hiring of a few permanent management and technical positions is often necessary to ensure the successful operation of the vocational training.
Through this exempt program, merchandise may be created which can be sold to support the organization. Such revenue is not considered unrelated business income as the products being sold are the result of the exempt function of the organization. That is, as long as the product is being sold in the same state it is when the exempt functions are completed, or at the end of the training production line.
A good example of this can be found on page 3 of IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations:
For an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business.
If an exempt organization maintains an experiential dairy herd for scientific purposes, the sale of the milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc., the sale of these products is an unrelated trade or business, unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization.
The income from the sale of products is used to finance the activities. Any operating deficits are met by public contributions.
The organization may provide job placement services once participants have completed their training. Such placement cannot be with any businesses that officers, directors, trustees, or other key insiders have an interest in, as this would be private benefit to said individuals as well as their for-profit companies. An organization found to be placing participants in related for-profit ventures could face intermediate sanctions in addition to revocation of exemption.
RESOURCE(S)
IRS Revenue Ruling 73-128
IRS Revenue Ruling 75-284
IRS Revenue Ruling 73-127
IRS Revenue Ruling 76-94
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