Charities Should Use Caution when Pursuing “Business” Activities

By Zachary S. Kester, JD, LLM, CFRM

The modern nonprofit sector is vibrant and adaptable, especially after coming off the heels of the largest and longest recession in modern history. Many charities are pursuing opportunities to ensure stability by providing services for a fee and by selling goods. Consultants even hold seminars on developing earned income streams. Most charities, however, do this at some risk, and should be cautious in how they expand and manage business-related activities.

As recently as this month the IRS has denied or revoked the tax exempt status of charities for their activities being too “commercial”.

The IRS relies on the “commerciality doctrine”, a little-known, entirely judge-made doctrine. The commerciality doctrine prohibits a charity from directly engaging in activities in a commercial manner, especially where the activity is conducted in substantially the same manner as by for-profit organizations.

Unfortunately, there is no clear guidance on what constitutes impermissible “commerciality”, leaving nonprofits and their advisors guessing. There are, however, steps you can take to protect your organization. There are best practices as well as certain organizational policies and structures that can minimize the risk of becoming too “commercial” in nature.

Charities should seek competent counsel when reviewing, modifying and expanding earned revenue streams and fee-for-service programming.

With highly experienced legal, accounting and training personnel, Charitable Allies (www.charitableallies.org) provides all manner of legal and educational services for boards, officers management and staff of myriad charities throughout the sector. From basic one-time questions about a single matter to training for boards and officers to complex reorganization or merger of activities, Charitable Allies is your go-to cost-effective provider of legal services to nonprofit organizations.

Contact Zac Kester, Executive Director, at 317-429-1649 or zkester@charitableallies.org with any questions.