In last week’s post, we saw that major sources of nonprofit income for public charities include (from largest to smallest):

1. Fees from private sources (also called program service fees)
2. Government grants and contracts
3. Private contributions
4. Investment income
5. Other sources

The above “big picture” is from Forms 990 and 990-EZ filed with the IRS. These income sources may not be reflective of small nonprofits or your nonprofit in particular, but they do give us an idea as to possible income streams. (Click here if you want to revisit our last post and see a pie chart of the revenue sources.)

Let’s take a closer look at the main categories of income.

Program Service Fees

Program service fees are earned from activities at the heart of a nonprofit organization’s mission. Because such activities are “substantially related” to the organization’s exempt purpose (such as religious, educational, or charitable), the related income  is exempt from tax.

If earned income is not “substantially related” to the organization’s exempt purpose, it may be classified as Unrelated Business Income (UBI) subject to tax unless a special IRS exception applies. (More on that in future posts.) Nonprofit attorneys Hurwit & Associates explain it this way: “The fact that income was produced for use in furthering exempt purposes does not qualify the income as related; the income itself must be derived in the course of furthering an exempt purpose.”

As an example of program service fees, an organization provides therapeutic horseback riding lessons for veterans suffering from PTSD. The lessons directly relate to organization’s exempt purpose of helping veterans recover from PTSD. Therefore fees charged for the lessons are substantially related to the organization’s exempt charitable purpose.

Government Grants and Contracts

Federal, state, and local governments award grants and contracts to nonprofit organizations. For example, a nonprofit receives funding from city and county governments to conduct studies and provide public education about pedestrian safety. Another nonprofit receives federal funding for preventive health screenings for low income women.

The Federal government offers a Grants Learning Center to cover the basics of finding, applying for, managing and reporting on federal grants. For state grants, check with the applicable state agency or department for grant opportunities.

Nonprofits may also receive funding from government agencies as a vendor instead of a grant recipient. For example, a nonprofit is a vendor to a state government to provide employment services to youth and adults.

The distinction between grants and contracts and the related accounting requirements is often a gray area. In June the Financial Accounting Standards Board released Financial Accounting Standards Update (ASU) 2018-08 to clarify the distinction between and the accounting requirements for grants and contracts, as well as other issues surrounding contributions. More on ASU 2018-08 in a future post.

Private Contributions

Private contributions may also be called gifts or grants. Essentially gifts, grants and contributions refer to the same thing – value given by a donor without receiving commensurate value in return.

Contributions come from many sources and take many forms.  Consider the following types of contributions:

• Unrestricted cash contributions
• Promises to give in the future (pledges)
• Sponsorships
• Bequests
• Planned gifts
• Endowment gifts
• Restricted grants
• In-kind gifts of goods, services, and free or below-market rent
• Unreimbursed volunteer out-of-pocket expenses

Now consider possible sources of contributions

• Individuals
• Donor advised funds
• Private foundations
• Corporations
• Civic clubs
• Churches
• Government
• Third party events
• Special events (usually a combination of earned income and contributions)

The above lists are not meant to be exhaustive. We want to point out the wide variety of types and sources of contribution income we’ve encountered over the years in working with our clients.

Your Thoughts?

What are the sources of income for your nonprofit? Which do you find most challenging? Please let us know. We plan to feature real life examples of income sources, give a heads up about potential pitfalls and offer accounting solutions for common sources of nonprofit income. Who knows, we may feature your observation or question!