Across the country, not-for-profit organizations are thinking outside the box and expanding on their original goals with a desire to help those for a societal reward, not a monetary one. However, social entrepreneurship brings with it a whole wealth of tax considerations, and missing an important form, payment or deadline can not only impact your new project but also your existing not-for-profit.
While this is true, taxes shouldn’t be a reason to put aside your social entrepreneurship goals. Thankfully, there are a number of effective strategies to handle the taxation aspect of this process. But, these methods are most efficient when started early, so you can ensure that fiscal problems won’t derail your new idea or come back to hamper your original mission.
Social entrepreneurship is an important part of the process
The idea of “social entrepreneurship” is a relatively new phrase, although the concepts have existed for a while. Recently, this activity has become much more common, and it is increasingly important that not-for-profits continue to expand into this area as an additional source of revenue.
According to Fast Company, change is on the horizon for social enterprises across the country. At the 10th Annual Skoll World Forum, a gathering of some of the world’s most prominent social entrepreneurs, attendees discussed the future of this practice. Many people agreed that tides are shifting, with more rapid growth and new methods of achieving goals. Overall, this is all positive, as social entrepreneurship can lead to expanded opportunity to serve your mission.
In order to accomplish their goals, social entrepreneurs must have a firm grasp on each element of their not-for-profit organizations. For example, the taxation side can prove complicated at times. This is why it takes an understanding of the concepts in order to avoid problems and facilitate success. Here at Clark Schaefer Hackett, we have spent decades working closely with not-for-profits to help handle tax, audit and advisory issues. Our dedicated team knows the details that matter to you – and we will make sure your new social entrepreneurship project goes off without a compliance hitch.
Start early to prevent problems
Getting a strong grasp on the taxation side of your social entrepreneurship venture requires starting early. As soon as you have an idea, make sure you take a few important steps along the way to ensure that all your financial requirements are in order. This process is broken down into two general segments: the startup phase and the tax structure.
First, analyze your idea during the startup phase. At this time, you’ll want to determine the project’s feasibility to figure out if it is not only a smart course of action but one that won’t jeopardize your existing mission and tax-favorable not-for-profit status. Feasibility is broken up into three main segments:
The first question you should be asking yourself is “What do I need to take my idea to market?” This includes individual steps, from the prototype stage to sample test markets and much more. It also requires that you determine if you need a new facility, and if so, what must be in place so it is operational. Finally, look into your regulatory requirements. This is a key part of the process, as there may be regulations that impact your social venture and the parent organization.
This part of the process is when you determine who needs to be involved so your social enterprise will be successful. Are you working with people already a part of your not-for-profit? Or are you working with outside sources? In some cases, it may also be wise to bring in new staff members altogether. The folks that made your organization successful so far may not be the same group to operate this new enterprise. No matter your choice, figure out what skills they must have to operate the new venture successfully.
Finally, convert all your existing information into numbers. Then, project scenarios that may play out if you go ahead with this venture. Decide if you want to perform the service or manufacture the product in house, license it out or possibly another option. Also, look into funding options, such as grants. Can you handle the ups and downs of cash flow and income? Are the costs worth it? This stage will answer those questions.
Is your activity mission-aligned?
With a grasp on feasibility, you can now move on to one of the most important questions of social entrepreneurship: Is your activity mission-aligned? The answer to this question will provide guidance on how to proceed with the Internal Revenue Service (IRS).
To begin, contact the IRS to let them know you have a new activity. This gives them the opportunity to weigh in on whether or not they consider it mission-aligned as well. Determining if your activity is unrelated and subject to income tax means answering all three of these key questions:
- Is it a trade or a business?
- Is it regularly carried on?
- Is the activity unrelated to your exempt purpose?
No matter your answers, think about separating the activity from your main organization as a way to minimize risk. Properly structured, you can safeguard your organization from possible risk that the new activity may entail. This will probably involve the creation of a wholly owned limited liability company.
If it is unrelated, you will be subject to the Unrelated Business Tax. Common unrelated business activity includes debt-financed rental income, advertising and sales of insurance, to name a few. Also check to see if you meet an exception and look into exclusions. The Internal Revenue Code has provided for several exceptions from the unrelated business income tax. Some examples are the use of volunteer labor or the sale of donated goods. Some types of income are excluded from income tax such as dividends or royalty income.
Make sure your tax filing is in order
The last step is figuring out your taxes. With an unrelated activity, you will use a separate form from the 990, but it is due at the same time. You will prepare a Form 990T if your unrelated business income (UBI) is greater than $1,000. In addition, determine your expenses so they can be factored in as well. In addition to deducting expenses, each filer is given a $1,000 exemption which will further reduce your income from an unrelated activity. If you don’t report, the IRS can go back as far as they want to recapture any missed taxes.
Your tax filing will hinge on whether or not your new activity is related or unrelated to your existing mission. Answering this question can be complicated at times, which is why it helps to document every step of the process and work with outside advisors. You’ll know exactly how you need to proceed for your tax purposes.
Work with experienced professionals to handle all your tax needs
The not-for-profit industry is unique. It is an in-depth and complicated sector, with its own set of requirements that must be addressed. Therefore, advisors must have the experience of working with not-for-profits year-round in order to provide valuable services. Clark Schaefer Hackett’s team is dedicated to this industry. Our professionals know the rules and regulations you face on a daily basis, so we can provide the crucial guidance you need.
With CSH, you will have the best tax, audit and advisory services. Since our team is engaged with the day-to-day issues of the not-for-profit sector and involved in the community, we can provide accurate guidance. When consulted, we will make sure your social entrepreneurship venture is as seamless as possible.