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Tax-Exempt Organization’s Side Hustle?

These days everyone is talking about picking up a side hustle, whether it’s selling items on the internet or driving for ride-sharing companies. Extra cash is extra cash, and who doesn’t want more money?

Generally, a side hustle is different from your daily job and outside of your normal workday (and possibly your expertise). Just like people are looking to make additional money in non-traditional ways, tax-exempt organizations are consistently looking at ways to increase revenue, which can sometimes lead them outside of their expertise. Tax-exempts need cash to function and anything they can do to increase program service revenue, contributions, or other revenue without increasing expenses disproportionally, assists in achieving their mission.

Most tax-exempt organizations have a well-defined mission, to lead its purpose and direction. This is often accomplished by having one main consumer driven line of service or product but may also provide a multitude of different services to accomplish their mission. Tax-exempts do not earn a profit for owners or investors but, rather to benefit all those supported by the organization. More services provided, hopefully, means more revenue generated to help more in the community supported by your organization.

Opportunities that may present themselves to earn additional revenue should be considered. These opportunities help provide valuable resources to support the tax-exempt’s mission. Consider shared services for an example. A nonprofit who handles the maintenance and landscaping of their own premises, but has excess capacity in that department, may assist a neighbor organization who wants to hire them to take care of the neighbor’s property. This is an opportunity to provide those services with the resources on hand and bring in additional funds to offset costs you are incurring either way. A cost-benefit analysis is a worthy endeavor to weigh such opportunities. Be sure to weigh the pros and cons of the arrangement. These may include additional revenue but also unrelated business income reporting, additional accounting requirements, additional insurance coverages, etc. Oftentimes, the pros are easy to identify but the cons may be overlooked and now the tax-exempt is in uncharted territory. With this not being the line of business most familiar to the tax-exempt, you may contract at a certain rate and have costs that you were not expecting and now could be losing money rather than providing additional resources to accomplish your mission.

Before acting, the tax-exempt organization should consider how much additional work is involved. Do you already have the workforce to accommodate this new line of service, or would you need to go out and hire additional employees? Also, does the new line of service or product align with your mission? If not, you will now have unrelated business income, which will be taxed. What is that impact on the revenue being generated? Does providing this service jeopardize our tax-exempt status? There are many questions to be asked and analyzed.

Performing an impact analysis does not automatically mean passing up on other revenue-generating opportunities. It simply means because you are a tax-exempt organization you may have other considerations that you are not accustomed to dealing with. These organizations need to be mindful of the totality of what they may be getting themselves into, its true benefit to the bottom line, and how much time it could take away from the mission. It may also be worth enlisting the knowledge of your outside accounting professionals – don’t hesitate to get in touch with our experts at Bonadio to further discuss.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.