However, in some circumstances, these organizations do end up producing a profit. Due to the nature of their relationship with the federal and territorial governments, nonprofits do not file taxes like a typical business. When a nonprofit does generate income, taxation is determined based on whether revenue was a result of work related to the organization’s cause.
When a nonprofit generates revenue due to activities related to its purpose, it typically does not have to pay taxes on those funds—as these organizations must generate enough financially to manage operating costs. These expenses may include employee salaries, utilities, office supplies and any other costs directly tied to daily operations.
If a nonprofit generates income through cause-related fundraising and events, funds from those activities are not taxed, even if profits go toward operating expenses. For example, if an animal shelter’s mission is to take care of stray dogs, it may host a fundraising dinner for the community. Profits stemming from the cause-related fundraiser would be exempt from taxation.
If profits are generated through activities that are not related to organization’s core mission, then those funds may be taxed. A nonprofit can maintain its tax-exempt status if this type of funding remains a small portion of its revenue, although it is possible for organizations to lose this privilege. To maintain its tax exempt status, a nonprofit must keep income from work unrelated to its mission at a minimum, ensure a majority of staff hours are spent on cause-related activities and require that all employees are hired exclusively to conduct mission-related work.
An example of an activity unrelated to the cause of a nonprofit would be if an animal shelter decided to open a grooming service for neighborhood pets. Income generated from the grooming service would be taxed as business revenue, as it is separate and unrelated to the main activities of the shelter.
However, there are a few exceptions to this rule. If an organization is selling items it has received as a donation, items worth less than $5 or a donor mailing list, it will not be taxed on profits from those transactions. Similarly, if a nonprofit produces income from activities carried out entirely by volunteers, or where the beneficiaries included employees, patients or students, the resulting profits would not be taxed.
To learn more about these issues, be sure to work with an experienced corporate law attorney focused on nonprofit organizations based in the U.S. Virgin Islands.
BoltNagi is a widely respected and well-established business law firm serving clients throughout the U.S. Virgin Islands.