Earned revenue is money that a charity earns for providing goods or services. Contributions are donations with donor designations, which may have restrictions on how the money can be spent.
What is nonprofit earned revenue?
As you all know, nonprofits serve an important role in your community by providing services not readily available from businesses and government. Some nonprofits, depending on their mission, generate revenue by providing services to the community, such as medical clinics, schools and arts organizations. The fees that nonprofits charge for these services are classified as earned revenue. This revenue must be reported separately from money raised from donations and fundraising events. Nonprofits that earn too much from certain types of earned revenue can face questions about whether their nonprofit status is legitimate.
What are charitable contributions?
The difference between nonprofit earned revenue and contributions is quite simple. Earned revenue is money that a charity earns for providing goods or services. For example, fees billed for medical services at a clinic, or sales of tickets at a performing arts center are common types of earned revenue.
Donations are gifts made freely without receiving anything in exchange. Monetary donations are most common, but many charities also accept in kind donations such as clothing or food.
A donor’s contribution to a nonprofit organization will qualify as a charitable deduction on the donor’s income tax return. However, there are nonprofits that qualify as tax-exempt but their donors’ contributions do not qualify as charitable deductions (although they may qualify as business expenses).
For the donor, the difference between donations and earned revenue is that only donations are eligible for a tax deduction. Payments for goods or services don’t qualify because what you receive is equal in value to what you pay, taking away any charitable intent. A nonprofit has no restrictions on the amount of funds they raise from earned revenue as long as the revenue is tied to their mission. But, if the nonprofit generates revenue that is not related to their mission, that revenue is considered unrelated business income and the nonprofit may pay a tax on that revenue. Plus, if the nonprofit earns too high a percentage of its overall revenue from unrelated business activity, it risks losing its tax-exempt status entirely.
Nonprofits have to think like businesses when it comes to raising money to fulfill their mission. But, they need to be careful that they do not earn too much from unrelated business activity so the can avoid unwanted scrutiny from those seeking to challenge their charitable status.
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