Nonprofit Technology

How to Maximize Nonprofit Income While Maintaining Your 501c3 Tax-Exempt Status

Published by in Nonprofit Technology

What nonprofit doesn’t want more funding for accomplishing their goals? With enough funding, you can hire more employees, pay them the salaries they desire, buy updated nonprofit software to make your organization run smoothly, and grow your programs to benefit your community.

501c3 Tax- Exempt

However there is always a risk associated with adopting new funds. Nonprofits must abide by laws which determine their tax-exempt status as a 501(c)(3) organization.

There are certain revenue streams nonprofits can and cannot accept, some that fall within a grey area, and some which are completely up for grabs.

Here’s how you can maximize your nonprofit income while maintaining your 501(c)(3) tax-exempt status.

Diversify your fundraising

Similar to a stock portfolio, it’s best to diversify your fundraising sources. With diversified fundraising, if one donor cuts off funding, you’ll still have several other sources to fall back on. The loss is regrettable, but it will be negligible in the grand scheme of things.

Outside of your standard fundraising methods, such as mail or email campaigns and traditional fundraising events, there are plenty of other ways to draw in donors. Here are six ways to diversify your fundraising:

  1. Crowdfunding

The internet is a marvelous invention that enables people to join together for similar causes, even if they’re from another state or country. Crowdfunding has revolutionized the way we think about internet fundraising by providing a platform for like-minded individuals to contribute their money to causes and initiatives through social media connections and viral marketing. This way, you target not only your followers, but all those who are as passionate about your issues as you are.

Just be sure you understand the laws for each state when crowdfunding, so as not to put your tax-exempt status at risk. Luckily, most states have not yet addressed crowdfunding solicitations, but that will likely change in the future.

Crowdfunding is perfect for funding large projects. It is built around selling an idea to the masses, and large projects with tangible results show your donors what their money will be used for in the end.

  1. Peer-to-peer fundraising

Peer-to-peer fundraising is similar to crowdfunding; Both rely on online platforms to fundraise, but the methods for attracting donors are different. While crowdfunding relies on complete strangers on the internet giving to your cause, peer-to-peer relies on your existing network of members reaching out for help. Think of it as a web of “friends of friends” all coming together for your cause.

Peer-to-peer fundraising is perfect for funding overhead and operational spending, since it is based on a more impersonal connection, unlike traditional crowdfunding. There are several notable examples of P2P campaigns to draw inspiration from, such as To Write Love on Her Arms (a suicide prevention campaign) and Barbells for Boobs (a breast cancer research campaign).

  1. Monthly giving programs

Rather than constantly trying to recruit one-time donors, why not set up a monthly giving program to maintain a regular stream of donations? Monthly giving programs ought to be incentivized with special privileges not afforded to the one-time donor, such as exclusive swag, discounted access to events, or special recognition on project sites.

Monthly giving programs are also better suited for funding operational costs since donations are collected on a regular basis.

  1. Virtual assets for fundraising events

Not everyone will make it to your fundraising events, but that doesn’t mean they ought to be left out of loop. Try live streaming your fundraising events, as well as setting up online fundraising pages, so remote attendees can still contribute.

  1. Grants

Universities and government entities hold the keys to tons of fundraising opportunities through grants. Grants are perfect for funding large projects, since grant proposals are easily drafted around such projects. When writing a grant proposal, you are selling an idea to an organization. It is easier to sell a project with a clear and definite result rather than selling the bland idea of funding everyday operating expenses.

Check out our guide for creating a quality grant proposal to improve your chances of success.

  1. Corporate giving

What better way for corporations to lessen their tax burden than by giving some of their profits to good causes? Seeking out corporate donations are a great way to fund large projects in bulk, but be warned: Don’t rely too heavily on corporate donations. These donations are typically large, but once they’re gone, they have the potential to leave gaping holes in your fundraising.

This makes corporate giving better for funding large projects rather than everyday operational expenses. If you lose a smaller donor here or there, it doesn’t make as significant of an impact as one large donor cutting off crucial funding.

Don’t be afraid to make a profit

In my piece on nonprofit management myths, I addressed the misconception that nonprofits are not allowed to profit from their work. The truth is, the word “nonprofit” is misleading. In order to maintain your 501(c)(3) tax-exempt status, your organization must fulfill one of several purposes laid out by the federal government: charity, religious work, scientific advancements/advocacy, or education.

The primary focus of nonprofit organizations isn’t to make a profit, but there is nothing that prohibits profit as a byproduct of an organization’s main goals. Profits made through related activities are tax-exempt so long as that money is reinvested into operating expenses.

NOLO, a legal advice resource, goes in-depth on this topic using Friends of the Library as an example:

“Let’s take as an example a group called Friends of the Library, Inc. It’s a 501(c)(3) nonprofit (which means it has a federal tax exemption), organized to encourage the appreciation of literature and to raise money for the support and improvement of the local public library. It makes a profit from a lecture series featuring famous authors and from an annual volunteer-run sale of donated books.Because these activities are educational and literary in nature, they do not jeopardize the group’s tax-exempt status, and the proceeds from them are not taxable.”

Nonprofits may also make a profit off of activities which are not directly related to their stated goals, however that money must be taxed under corporate tax laws.

For example, according to this hypothetical scenario laid out by NOLO:

“People donate many thousands of books to Friends of the Library for an annual book sale. Although the sale is always successful, let’s say that one year thousands of books are left over, and the group decides to sell the more valuable of these books by advertising in sources for rare and out-of-print books. The response is overwhelming, and before long the Friends of the Library has six employees cataloging books for sale. Soon, Friends of the Library finds itself in the business of buying books from other dealers and reselling them to the public. The nonprofit will have to report these earnings to the IRS, which will tax them as income from unrelated business activities.”

Sell t-shirts, write and sell books, and hold events with high profile speakers. So long as that income is diverted back into operating expenses or is taxed at the corporate rate your 501(c)(3) status will remain intact.

Want to improve your fundraising?

Now that you’re equipped with some new ways to draw in income for your nonprofit, why not look into ways you can improve your fundraising campaigns?

Here are several resources from the Capterra Nonprofit Blog you can use to make the most of your fundraising campaigns:

Have you found any new ways to maximize your nonprofit income? Be sure to let me know in the comment section below!

Looking for Nonprofit software? Check out Capterra's list of the best Nonprofit software solutions.

About the Author

Nick Morpus

Nick Morpus

Nick Morpus is a former Capterra analyst.


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