As a nonprofit, being tax-exempt doesn't mean you can't make a profit. In fact, nonprofits can generate surplus revenue, which remains untaxed. But what should you do with these untaxed profits? Let's explore some options:
Expanding Programs, Products, and Services
One of the most straightforward uses of surplus revenue is to expand your organization's programs, products, and services. This could involve:
- Introducing New Programs: Identify unmet needs in your community and develop new programs to address them. For example, a food bank could expand its services to include nutritional education programs or job training initiatives.
- Scaling Existing Programs: If you have successful programs, consider scaling them up to reach more people. For instance, a literacy program could expand to serve additional schools or neighborhoods.
- Enhancing Service Quality: Invest in improving the quality of your existing programs. This might involve hiring more skilled staff, upgrading equipment or facilities, or implementing new technologies to streamline operations.
Investing in Infrastructure Improvements
Another potential use of surplus revenue is to invest in infrastructure improvements. This could include:
- Upgrading Facilities: If your organization operates out of a physical space, consider investing in renovations or upgrades to improve functionality, accessibility, and safety.
- Investing in Technology: Upgrade your organization's technology infrastructure to increase efficiency, enhance communication, and improve data management. This could involve purchasing new software, upgrading computer systems, or investing in online fundraising platforms.
- Building Organizational Capacity: Invest in building the capacity of your staff and volunteers through training programs, professional development opportunities, and leadership initiatives.
Saving for Future Risks or Opportunities
It's important for nonprofits to build financial reserves to weather unexpected challenges or seize new opportunities. Consider:
- Creating a Reserve Fund: Establish a reserve fund to cover unexpected expenses, such as emergency repairs, unexpected drops in funding, or economic downturns. Aim to build up a reserve equivalent to several months of operating expenses.
- Planning for Future Projects: Set aside funds for future projects or initiatives that align with your organization's long-term goals. This could include launching new initiatives, expanding into new geographic areas, or investing in strategic partnerships.
Understanding Nonprofit Tax Designations
Nonprofits in the United States are classified into different tax-exempt categories, each with its own rules and regulations:
- 501(c)(3) - Charitable Organizations: These organizations, like public charities and religious groups, are dedicated to philanthropic, religious, educational, scientific, or literary purposes. They can engage in limited lobbying but are prohibited from participating in political campaigns. Donations to 501(c)(3) organizations are tax-deductible.
- 501(c)(4) - Civic Leagues and Social Welfare Organizations: These organizations, such as advocacy groups and civic associations, focus on promoting social welfare and civic engagement. They can engage in substantial lobbying and some political activity. Donations to 501(c)(4) organizations are generally not tax-deductible.
- 501(c)(6) - Business Leagues and Trade Associations: These organizations, like professional associations and chambers of commerce, are formed to promote the common business interests of their members. They can engage in lobbying and advocacy activities. Donations to 501(c)(6) organizations are not tax-deductible.
Be sure to check out our previous article ‘Advocacy Versus Lobbying.’ This article aims to clarify the distinction between the two while providing specific scenarios to illustrate their differences.
Making Informed Choices
Understanding the different tax-exempt designations is crucial for nonprofits as it determines the activities they can engage in and the benefits they can offer to donors. By carefully choosing the right tax-exempt status and utilizing surplus revenue effectively, nonprofits can maximize their impact and achieve their mission.
In conclusion, surplus revenue presents a valuable opportunity for nonprofits to grow, innovate, and build resilience. Whether it's expanding programs, investing in infrastructure, or planning for the future, strategic use of untaxed funds can propel organizations forward in their mission to create positive change in the world.
