Can nonprofits make a profit?

If you’ve ever thought about starting or joining one and wondered: can nonprofit organizations make a profit?

And how exactly do they make money? This comprehensive guide gives you all the answers.

One of the biggest misconceptions about nonprofit organizations is that they can’t generate profit.

In reality, nonprofits can—and must—make a profit to sustain their mission.

The key difference between nonprofits and for-profit businesses lies in how they use, and are accountable for, this revenue.

Nonprofits follow unique financial guidelines.

While for-profit companies distribute profits to shareholders, nonprofits reinvest all earnings into their mission and programs.

This reinvestment fuels long-term growth and amplifies the nonprofit’s impact.

In return, nonprofits can apply for tax-exempt status, provided they meet specific Internal Revenue Service (IRS) requirements.

Nonprofits that opt out of tax exemption may face higher operational costs and lower available revenue due to increased taxes.

This article will explore how nonprofits make money, dispel common myths, and help you understand how they can maintain compliance while managing profits.

Here’s what we’ll cover

Five myths about how nonprofits make money

Misunderstandings about nonprofit finances can lead you to assume these organizations can’t or shouldn’t generate revenue.

Here’s five myth-busting facts about how nonprofits make money and manage their finances:

Myth 1. Nonprofits can’t make money

Contrary to popular belief, nonprofits can generate revenue to sustain their operations and fulfill their mission. This revenue allows nonprofits to cover operational expenses, expand programs, and invest in future projects that align with their cause.

Nonprofits earn money in a variety of ways, including donations, grants, membership programs, and fees for services or products related to their mission.

While both nonprofits and for-profits generate revenue, nonprofits prioritize using funds to create positive social or community outcomes.

This distinction is central to how nonprofits operate and is recognized by the IRS, which can grant tax-exempt status to organizations that reinvest earnings solely to support their mission.

Myth 2. Nonprofits don’t pay staff

Nonprofits can and should pay their employees competitive wages.

Like for-profit companies, nonprofits need skilled professionals to manage operations, lead programs, and drive the organization’s mission.

Nonprofit salaries are essential for attracting and retaining talent, ensuring the organization runs efficiently and achieves its goals.

Myth 3. Nonprofits rely solely on donations

While donations are a crucial source of funding for many nonprofits, they are not the only way these organizations generate revenue.

Nonprofits often diversify their income through grants, membership programs, and by offering goods or services aligned with their mission.

Myth 4. Nonprofits don’t pay taxes

Nonprofits can choose to not apply tax exemption.

And, although 501(c)(3) nonprofits are exempt from federal income tax, this doesn’t mean they are entirely free from tax obligations.

Depending on their location and specific activities, nonprofits may still be required to pay other types of taxes, such as payroll taxes for their employees and property taxes on owned real estate.

Myth 5. All nonprofits are large organizations

You might think that all nonprofits are large, national, or global organizations with big budgets and numerous employees.

While organizations like the Red Cross or UNICEF fit this description, there are small, community-based nonprofits with modest budgets, limited staff, and a strong reliance on volunteers.

Many serve specific local communities or niche causes, addressing needs that larger organizations may overlook.

There are also key differences between nonprofit and not-for-profit organizations that help explain the diversity in structure and funding models across the sector.

Can nonprofits make money?

Yes, nonprofits can and should make money.

While they follow different financial regulations than for-profit businesses, generating revenue is crucial for funding their operations and expanding their programs.

Here’s how nonprofits make money through key income sources:

Donations

Donations from individuals, corporations, and foundations are a primary source of income for many nonprofits.

They can be one-time contributions, recurring gifts, or in-kind donations such as goods and services.

Some nonprofits also use crowdfunding platforms to fund specific causes or projects.

Among the different types of donations, individual contributions play a critical role in sustaining nonprofit activities.

These include:

• Event contributions: donations made through specific events, such as charity auctions or community outreach events organized by the nonprofit.
• Online donations: contributions made through online channels, including website donation links, social media fundraising, and mobile giving platforms.
• Stock donations: donors may choose to give appreciated stocks or securities, which can benefit the nonprofit and the donor through tax advantages.
• Planned gifts: planned giving includes bequests or designations in a donor’s will, life insurance policies, or trusts, offering nonprofits a way to secure long-term funding for future projects.

Grants

Nonprofits can apply for grants from government entities, foundations, and corporations, often to fund specific projects, research, or initiatives with their mission.

Unlike loans, grants do not need to be repaid, making them an attractive funding source.

According to Candid, in 2022, foundation funding alone accounted for approximately $105.21 billion, or 21% of total U.S. charitable giving.

When considering all revenue sources including all revenue resources, including government funding, program revenue, and investment income, foundation and corporate grants made up 15.3% of nonprofits’ total funding.

Successful grant applications generally require a clear alignment with the nonprofit’s mission to secure this essential support.

Applying for grants, however, can present some challenges for nonprofits, as grant funding is typically restricted to the specific project or purpose for which it was awarded.

This restriction requires nonprofits to have effective tracking systems in place to ensure that funds are allocated appropriately.

Nonprofits must also account for every expenditure related to the grant, often down to very specific budget lines.

Most grants also come with strict guidelines on fund allocation, tracking, and reporting to maintain transparency and accountability with the grant provider.

To manage these complexities, choosing the right grant tracking software to monitor restricted funds and ensure compliance with grant terms, can allow them to focus on delivering impactful programs.

Services or products

Some nonprofits generate revenue by offering services or selling products related to their cause.

For example, museums may charge admission fees, while environmental nonprofits may sell eco-friendly merchandise.

Membership programs with exclusive content or event access also generate income and can increase community engagement.

Fundraising events

You’ve probably been aware of various galas, auctions, or community fundraisers in your social feeds.

These help to raise essential, additional funds.

Charitable events provide valuable opportunities to engage with donors, increase awareness of the nonprofit’s mission, and generate revenue through ticket sales, auctions, or sponsorships.

Using fundraising software for nonprofits can further enhance these efforts by streamlining event management, tracking donations, and maximizing donor engagement.

501(c)(3) status and tax exemption

Nonprofits recognized under the 501(c)(3) section of the Internal Revenue Code, often called 503c nonprofits, are granted tax-exempt status.

This means they don’t pay federal income tax on their money as long as their income supports their mission.

However, to maintain this tax-exempt status, nonprofits must adhere to specific rules and requirements:

• Restricted profit distribution: nonprofits cannot distribute profits to owners or shareholders. Any excess revenue must be reinvested into the organization’s programs, growth, or operational needs.
• Annual tax filings: nonprofits are required to file an annual tax return with the IRS, such as Form 990, to report gross receipts and provide a detailed breakdown of funding and spending for the year.
• Political neutrality: nonprofits should avoid participating in political campaigns, as doing so could jeopardize their tax-exempt status by indicating favoritism or political bias.
• Formal contractor and compensation agreements: to comply with IRS guidelines, nonprofits must maintain formal processes for contractor management and establish clear compensation agreements for employees.

How do nonprofits make money?

How nonprofits make money and profit depends largely on how they handle that revenue to maintain their tax-exempt status.

Here’s how they manage related and unrelated income:

Related business income versus unrelated business income

Nonprofits generate revenue through two primary types of income: related business income and unrelated business income.

Understanding the difference between these income types is essential for managing tax obligations and maintaining tax-exempt status.

Related business income

Nonprofits often generate income from activities related to their mission, known as related business income.

For example, a nonprofit environmental organization might sell educational materials about conservation.

Revenue generated this way is not subject to taxes as long as it directly supports the nonprofit’s mission.

Unrelated business income

Unrelated Business Income (UBI) refers to money earned from activities that are not directly related to the nonprofit’s mission.

For most organizations, activities are unrelated when they meet three specific requirements: it is a trade or business, it is regularly conducted, and it is not related to their mission.

This income can be further classified into taxable UBI and non-taxable UBI:

• Taxable UBI: income from regularly conducted activities that do not support the nonprofit’s mission. Examples include operating a retail shop or renting property to business unrelated nonprofit’s goals. This type of income is subject to federal income tax, and nonprofits must report it annually to the IRS.
• Non-taxable UBI: certain types of unrelated income may be exempt from taxes. Non-taxable UBI can include activities that are infrequent, conducted primarily by volunteers, or involve selling donated goods. Income generated from these activities typically does not require taxation, as it falls within the IRS guidelines for exempt UBI.

What do nonprofits do with profits?

So, your next question might be, can a nonprofit make a profit?

Absolutely—and the profit is used to further the mission.

Nonprofits reinvest their revenue in program growth, hiring staff, upgrading technology, or creating reserves for long-term sustainability.

This approach not only supports their cause but also ensures they have resources to reach more people and grow impact.

Nonprofits may also allocate profits to fundraising efforts to attract additional support.

However, they use this income, and it must align with and support their mission.

Nonprofit salaries and compensation

While most employees working for nonprofit organizations are paid fairly, the IRS imposes certain limits on salaries, particularly for executives.

Nonprofits must carefully manage compensation to attract skilled talent while complying with regulations, and all compensation-related expenses must be reported in Form 990 for 501(c)(3) organizations.

Here are some common types of compensations in nonprofits:

• Executive compensation: executives in nonprofits are often highly qualified professionals, but their compensation must align with IRS guidelines to prevent excessive pay. Compensation that exceeds reasonable limits can result in penalties or jeopardize the nonprofit’s tax-exempt status.
• Staff salaries: employees are generally paid competitive, fair wages based on industry standards and the organization’s budget. To ensure transparency and accountability, nonprofits are required to disclose salary information in their annual tax filings.
• Compensation to volunteers: although volunteers usually work without pay, some nonprofits may offer stipends, reimbursements, or small benefits to cover out-of-pocket expenses related to their services.

Creating a compensation policy for executives is a valuable strategy for determining fair and competitive pay for these roles.

Such a policy ensures that compensation aligns with similar organizations in the nonprofit sector.

A well-defined policy promotes transparency and supports the organization’s commitment to responsible financial stewardship. It can be a great way to build trust with your donors.

Common accounting mistakes to avoid

Setting up a nonprofit comes with unique accounting challenges, and mistakes can lead to financial issues or even the loss of tax-exempt status.

Here are some common errors that nonprofits should avoid:

1. Mismanagement of donor restrictions

Nonprofits often receive restricted funds from grants or donations that must be used for specific purposes.

Many grants come with detailed limitations from the grantor, outlining the funds’ allowable use, timing, and scope.

Proper tracking, allocation, and reporting of these funds are essential to avoid financial mismanagement and ensure compliance with donor requirements.

Understanding fund accounting principles and nonprofit accounting standards is key to managing restricted funds effectively.

Using a nonprofit accounting solution enables nonprofit teams to track restrictions accurately and automatically record when funds become available for use.

2. Not tracking unrelated business income

As mentioned earlier, UBI is taxable and must be reported to the IRS.

Nonprofits that fail to track and report UBI accurately may face penalties.

3. Poor financial documentation

Nonprofits must maintain thorough documentation of their income and expenses, including receipts for donations and records of how funds are spent.

Poor documentation can result in compliance issues during audits.

Staying up-to-date with the latest nonprofit technology trends can significantly boost an organization’s operational efficiency.

These tools help streamline processes, enhance transparency, and improve fundraising efforts.

What happens when a nonprofit fails to comply with regulations?

Failing to comply with IRS regulations can have severe consequences for a nonprofit.

You’ve probably read some of the higher-profile cases in the news cycle.

Mismanaging funds, engaging in excessive lobbying, or failing to report UBI can lead to the loss of tax-exempt status, forcing the organization to pay federal taxes, which could significantly hinder its ability to fulfill its mission.

Nonprofit financial management goes beyond compliance—it’s about demonstrating responsible stewardship.

Donors, funders, and the board expect proper resource handling per the organization’s mission.

Poor financial management or failure to follow regulations threatens tax-exempt status and erodes trust.

In addition to losing tax-exempt status, nonprofits can face penalties, fines, legal action, and, in extreme cases, dissolution.

So if you’re thinking of starting a nonprofit, or run a fledgeling one, here’s how to avoid these risks:

• maintain strong internal controls
• use robust software tools
• conduct regular audits
• ensure staff are trained in compliance and financial best practices.

By staying transparent and adhering to IRS guidelines, nonprofits can safeguard their financial health and continue focusing on their mission.

Final thoughts

Running a nonprofit requires careful financial management to keep your mission on track and your organization compliant with regulations.

Explore our nonprofit accounting and management software to simplify your accounting, manage donations, track grants, and ensure your operations align with IRS requirements.