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501(c)(3) Selling Goods

Business Law discussions

501(c)(3) Selling Goods

Postby Dondre » Mon Sep 19, 2016 1:22 am

Hello,

I work for a 501(c)(3) that is registered in the US and also in Nicaragua as a non-profit. One of the projects that I started in Nicaragua involves Nicaraguan people making a good and then selling it within Nicaragua, but also within the US and on the internet. With the profits from the sales, we are able to construct school buildings and operate social products within the village that we are working. We also cover operational costs: $150/month salary of the project administrator, transportation expenses, etc. At first, our sales were very low, so we didn't have any tax worries. But, in the past year, we have grown to have about $50,000/year in sales. All of these sales are well-documented by the 501(c)(3)and our sources have told us that we are fine since the profits are going back into the 501(c)(3) to execute its main mission, but we want to make sure that everything we're doing is legitimate. From the US side of things, can you tell me if this all sounds legit?

Thank you!
Dondre
 
Posts: 48
Joined: Tue Jan 14, 2014 11:40 pm

501(c)(3) Selling Goods

Postby walt18 » Mon Sep 19, 2016 7:20 pm

Hello,

I work for a 501(c)(3) that is registered in the US and also in Nicaragua as a non-profit. One of the projects that I started in Nicaragua involves Nicaraguan people making a good and then selling it within Nicaragua, but also within the US and on the internet. With the profits from the sales, we are able to construct school buildings and operate social products within the village that we are working. We also cover operational costs: $150/month salary of the project administrator, transportation expenses, etc. At first, our sales were very low, so we didn't have any tax worries. But, in the past year, we have grown to have about $50,000/year in sales. All of these sales are well-documented by the 501(c)(3)and our sources have told us that we are fine since the profits are going back into the 501(c)(3) to execute its main mission, but we want to make sure that everything we're doing is legitimate. From the US side of things, can you tell me if this all sounds legit?

Thank you!
walt18
 
Posts: 55
Joined: Thu Feb 14, 2013 11:08 am

501(c)(3) Selling Goods

Postby Garanhon » Wed Sep 21, 2016 3:04 am

IRS Publication 598 "Tax on Unrelated Business Income of Exempt

Organizations" at

www.irs.gov/pub/irs-pdf/p598.pdf

explains that,  if products or services are not directly related to

the charitable, educational, religious or other purpose or function

constituting the basis for its exemption(other than for production

of income), then the activities are generally taxable.

Their exact wording is found in the middle column of page 3

"Unrelated business income is the income from a

trade or business that is regularly carried on by

an exempt organization and that is not substan-

tially related to the performance by the organiza-

tion of its exempt purpose or function, except

that the organization uses the profits derived

from this activity."

If you can document, however, that the people making the goods in Nicaragua would be poor if they did not make the goods for you, then it is possible to have those activities as directly related to a charitable purpose.  I would be willing to work on your matter furtheer, but I would need to spend a substantial amount of time analyzing your operations and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below. The IRS has declared, "Nonprofit organizations that are granted

Federal tax exemption based on their mission-related purposes

are allowed by the IRS, within certain limits, to generate income

from unrelated business activities."

www.irs.gov/pub/irs-soi/97eounrl.pdf on pdf page 1

The organization could, if it has more unrelated activities than

the IRS's vague "certain limit", be jeopardizing its exemption

depending upon the facts and circumstances. Two of the main factors

is the gross income of the activity in relation to the gross income

of the organization's total income and staff time spent on the

activity. Court cases reveal that 5% is probably safe, whereas 20%

or more can jeopardize exempt status. Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.
Garanhon
 
Posts: 29
Joined: Sat Apr 19, 2014 8:02 am


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