More Fees Than Contributions Threaten Tax Exemptions for Charities

While most of the contributions that arrive in the coffers of nonprofit organizations come from individuals, that is not the principal revenue source for most nonprofits.

Fees for services, sales, and other sources other than donations actually provide nearly 88 percent of overall nonprofit revenues (2005 figures from the National Center for Charitable Statistics).

That fact is causing legislators throughout the U.S. and the federal government to question whether many charities really deserve their tax exempt status.

An article in the NY Times explores this issue in depth, providing examples ranging from a daycare center in Minnesota that just lost its property tax exemption to universities and hospitals.

Nonprofit experts say that "earned income" is exploding among nonprofits as they seek to diversify their funding sources and make themselves less dependent on a sometimes variable donor-generated income stream.

In addition, the question of whether earned income is legitimate for a nonprofit speaks to the confusion about what nonprofits do and how they support themselves. Much of the public thinks nonprofits give away services for free. And many do. But others could never raise enough money from donors to pay for the expensive services they provide. A good case in point is a hospital. It has been assumed that, by and large, nonprofits provide those services more cheaply than a comparable for-profit entity.

The current rethinking of tax-exemptions, ranging from federal income tax exemptions to property tax exemptions, for nonprofits comes in the wake of concerns about high salaries at nonprofits and soaring tuition at universities with billion dollar endowments.

What will happen? Let us know your thoughts about this issue in the comments below.

More about nonprofit income:

• What Is Unrelated Business Activity?