fee for service programs are they “related” to exempt purpose? presented on may 2, 2012...

Fee for Service ProgramsAre They “Related” to Exempt Purpose?

Presented on May 2, 2012

Prepared by Melissa Auchard Scholz, Scholz Nonprofit Law LLC 2012.

All rights reserved.

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Earned Income by Nonprofits: Related or Not?

Key issue = how income is earned, not spent

If earned through activity that is related to exempt purpose, not taxable and no threat to tax-exempt status

If earned through “unrelated” business activity (unrelated business income or “UBI”), subject to unrelated business income tax (“UBIT”) and too much threatens tax-exempt status

Scholz Nonprofit Law LLC 2012. All rights reserved.

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Related v. unrelated business income:

Is the income earned from a “trade or business, regularly carried on, that is not substantially related” to organization’s exempt purpose?


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Trade or business is any activity carried on for the production of income from the sales of goods or the performance of service.

Business activities are regularly carried on if they occur with a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.


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Not substantially related: A trade or business is “related” only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes (other than through the production of income) and that causal relationship is a substantial one.

i.e., production of income, distribution of goods, or performance of service must contribute importantly to accomplishment of the exempt purposes


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Competition with commercial enterprise = strong indicator of UBI

Comparison to commercial operation, including:– Marketing– Advertising– Distribution– Scale– Suppliers– Price


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Exceptions include:– Volunteer labor

E.g., volunteers selling at snack bar– Convenience of clients/members

E.g, coffee shop at hospital– Donated merchandise

E.g., thrift shop– Qualified trade show or convention– Corporate Sponsorship Payment

Caution: sponsorship can’t be an advertisement


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Passive income is, generally, not UBI:– Interest– Dividends– Royalty payments– Rents from real property

UNLESS, except for dividends, from “controlled subsidiary” or debt-financed property


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Earned Income: Implication of UBI?

Net profit from UBI taxed at corporate rate– Expenses that are “directly connected with

carrying on” the unrelated business deducted against UBI

Insubstantial amount of UBI is OK– If >15-20% of annual gross receipts, unrelated

business should be done through for-profit subsidiary


Key Questions/Issues for Fee for Service Programs:

1) Will the service assist a charitable class? (e.g., poor or “lessen burdens of government”?)

2) Is anyone else providing the service?3) How will NP’s services be different than

typical commercial services?

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4) Could similar services be obtained by commercial providers or is the organization uniquely qualified to provide a particular service that helps fulfill a tax-exempt mission?

5) Will the services be “narrowly tailored” to focus on fulfilling charitable purposes or will focus be on earning revenue?

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6) How do you charge? Hourly? By project? Does 501(c)(3) have some risk? How will you determine fees (at cost, sliding scale, FMV)?

7) Who will be hired to perform the service? Whose equipment will be used?

8) How do clients find out about your services?

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9) How much flexibility do you want to maximize the commercial potential of the business?

10) Are you concerned about “brand confusion” or reputation of the 501(c)(3)?

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Contact Information

Melissa Auchard ScholzScholz Nonprofit Law LLC608/[email protected]

This presentation is intended for informational purposes only and is not intended as legal advice on specific matters, factual situations, or issues. Different facts, information or developments in the law may affect the material in this presentation.


fee for service programs are they “related” to exempt purpose? presented on may 2, 2012...

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