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Our Executive Director would like to supplement our publishing dollars by selling ads. I have been told by our grant writer that we cannot do this because the income would be treated in a different manner than the grants we are funded with.

Your grant writer is partially right, but probably not in a way which should cause you serious worry. Income from advertising will be treated differently from grant income in your financial reports and on your tax return, but it is certainly not prohibited by general tax or corporate law. Unless you have some very weird charter provisions or prohibitions from some funding source, advertising income would be permitted.

The issue with advertising income is whether it is classified as unrelated business taxable income (“UBTI”). In most cases, it will be UBTI if your publication is regularly carried on and subject to unrelated business income tax (“UBIT”) if you make a net profit of more than $1000 from the advertising. Unless your unrelated advertising becomes a substantial portion of your activities, you can probably deal with the problem of additional resources for your activities. (See Ready Reference Page: “Nonprofits Often Worry About UBIT.”)