What is our current % of unrelated income to our mission?

DMS General
1

I was talking with @Photomancer about this and he says it is 12% because all of the income we take in for classes are considered unrelated. I’m not at all certain that class fees are unrelated to our mission.

I found this … but I am looking for something more definitive.

Dallas Makerspace Mission Statement

This corporation is organized exclusively for charitable, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations under section 501c(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.

Within the limits of such purposes the corporation shall:

  1. Build and maintain spaces suitable for technical and social collaboration.
  2. Collaborate on all forms of technology, culture, and craft in new and interesting ways.
  3. Apply the results of its work to specific cultural, charitable, and scientific causes.
  4. Freely share its research and discoveries, using what is learned to teach others.
  5. Recruit and develop talented members dedicated to these purposes.
  6. Promote scientific, cultural, and artistic advancement
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Why do you think it makes a difference?

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If we go over a certain percent we have to start paying taxes or we could get into problem with our tax status. With the upcoming gift shop and if it is really 12% … it may not give us much margin. From the article we should be able to get income from classes and have it not count to our %

4

Could we say all items in the gift shop are available for a “recommended” / “suggested” donation amount?
The reason why I would like to know is because at some point the amazing tools we have could be used to produce products to sell on Etsy or elsewhere.
Each committee could raise their own money in new and exciting ways.
For example, Science is interested in making graphene supercapacitors via the CO2 laser - - should sell like hotcakes if they can be produced reliably - - so a recommended donation amount or some sort of donationware system would be very helpful in raising funds.
Is there something like a Patreon system for 501c3 organizations?

5

This was the DMS boogie monster several years ago. I thought we had staked this bad boy in the heart.

As we currently operate, we are well within IRS guidelines.

Earlier this year we got clarification from our accounting firm on how to handle different type income. Like when we open a gift shop. We will pay tax on the DMS share of that money. It will be insignificant compared to our overall income, which is good and another measure that we are indeed operating correctly as a 501c3 Corporation.

The sham version is to call yourself a 501c3 and run a full blown online store and .005 cents of every dollar goes to save the children of underwater basketweavers fund. IRS will hurt those folks. Rightly so.

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6

I thought this as well until @Photomancer said that our class fees count to our unrelated income.
And he said that is what PureTax is telling us. I don’t see how this is the case. I guess that is what I am asking @Diplomat … how is this the case?

From Emily Chan, attorney

Nonprofit organizations are generally limited in the amount of unrelated business activities they can conduct.

But the Internal Revenue Service (IRS) has not been specific about how much permissible earned income can be generated by unrelated sources.

Although no fixed percentage limitation exists, there are two main reasons why unrelated business income raises concern for public charities and most other exempt organizations under Internal Revenue Code section 501(c).

First, unrelated business income is taxable at the corporate tax rate (i.e., subject to the unrelated business income tax (UBIT).
Second, an exempt organization cannot engage in more than an insubstantial amount of unrelated business activity without risk of losing its tax-exempt status.
An “unrelated business” is defined by the IRS as a trade or business that is regularly carried on, and not for the most part related to the exempt purpose of the organization.

A related business means that the income-generating activity supports the organization’s exempt purposes, and does not just produce income.

Whether or not the activity produces income is not the most important fact. But what does matter is if that activity supports the organization’s mission.

The analysis of related vs. unrelated business activities can become quite complex. For instance, individual items sold in a museum gift shop could be classified either way.

There are also exceptions to the rule under Internal Revenue Code section 513(a) for certain activities.

These exceptions include:

Activities run by volunteers
Activities carried on for the convenience of its members, students, patients, officers, or employees
Selling of donated merchandise. (Passive income, such as interest, dividends, rents, and royalties is also generally excluded from unrelated business income.
Serious issues would likely exist under the unrelated business income rules for an organization with over 50 percent of its total gross income produced from unrelated business activity.

However, regulations are imprecise about where to draw the line below that 50 percent mark.

Without a fixed percentage limitation from the IRS, legal advisers often use various rules of thumb, although 20 percent is common.

Organizations should seek appropriate counsel or expertise when engaging in business activities.

If the activities do not meet the definition of an unrelated business or fall under an exception or exclusion, the organization may have much more flexibility in how it engages in such activities without triggering any penalties.

Resources:

IRS Publication 598 – Tax on Unrelated Business Income of Exempt Organizations

Does My Nonprofit Need to Pay Tax? Understanding Unrelated Business Income Tax, NPQ, 12/25/2011

This communication was not written or intended to be used, and may not be used, by any taxpayer for the purpose of (i) avoiding any tax-related penalty under the Internal Revenue Code, or (ii)

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We are having a working BOD meeting tonight. I will ask for details.

Most of our income is from dues.

I am not worried that we are out of bounds. What I dislike is the IRS causes anxiety by being vague. I would much prefer they give percentage ranges and they like the unknown better.

We ARE a non-profit. Per my example last night, we are not a full store that occasionally does good deeds.

The anxiety remains.

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I personally feel that any class income IS related to our mission. Dallas Craft Guild charges everyone for classes, and is an established 501c3 operating since the 1950’s. Plus, many class fees are purchasing class supplies and thus not income. What really gets the IRS interested is if any individual is receiving more than. … um… $50K or more from the profits without a specific role. We could pay an employee, but not a board member, for example. That we choose not to have employees is simply because we don’t want the hassle.

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It has been many years but it’s my understanding that if Dallas Craft Guild is a nonprofit then you should be able to look at their 990.

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