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What is our “gross revenue”?

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What is our “gross revenue”?

Our school parent association, which is independent of the school district, is contemplating 501(c)(3) status. I need a clarification on what "gross revenue" is. The majority of our money is made through brochure sales from a fundraising company. Parents make their checks out to the Association, which in turn, pays the vendor for the total sales. The vendor then mails us a check for our profit portion, about 30%. What is considered our "gross revenue": 1) the total sales amount (because they are funneled through our bank account) or 2) just the profit amount we receive from the vendor?

Normally, the IRS takes the position that the amount of money paid by a donor is the gross revenue from a fundraising effort and the charity is required to show the gross amount received and the amount paid (in your case about 70%) to raise the funds.  This kind of ratio for fundraising, when scrutinized by the donors, is not very attractive.

If you are selling stuff, however, it is a pretty good margin.  The question then is whether the effort is a trade or business (which it is) that is regularly carried on (more than a short campaign or two a year) and unrelated to the purpose for which you would seek exemption.  If it has all of those characteristics, it will generate unrelated business taxable income and be subject to unrelated business income tax (“UBIT”).  “Too much” unrelated business taxable income (and a majority of your income could certainly exceed that threshold) could cost you your exemption before you get it.  (See Ready Reference Page:  “Nonprofits Often Worry About UBIT”)

If the stuff furthers your charitable mission, other than producing income for your other programs, it should be program service revenue and fully supportive of your exempt purpose.  So you should be careful what you sell.  In either case, however, the “gross revenue” will most likely be the amount paid by your purchasers.

For more information on UBIT, consider purchasing our recorded webinar - Avoiding the Adverse Consequences of UBIT.

Tuesday, March 3, 2015
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