MacKenzie Scott’s latest $4 billion in gifts notwithstanding, nonprofits are struggling to make ends meet as the pandemic drags on, and the economic devastation in its wake continues. We all hope that the federal government will provide more relief for all sectors affected, including the nonprofit. Whether that help comes or not, one area many nonprofits should explore further in their quest for revenue—in the medium and long term—is earned income.

In this first of two blogs, we explore what constitutes earned income in the nonprofit world and give examples of different types of earned income. In the second, we will lay out some of the steps your organization might take as it considers whether to embark on an earned income strategy.

What do we mean by earned income?

Let’s define our terms. What exactly do we mean by nonprofit “earned income”? Earned income is revenue generated from the sale of goods, services rendered, or work performed. Such income falls into two categories: related business income and unrelated business income.

Related income is income that is closely tied to your mission. A good example is Girl Scout cookie sales, which help girls learn about finances and entrepreneurship. Unrelated income is income that is not tied to your mission. A good example is a church that notices that their building is close to a new sports stadium. They decide to sell parking during events. Since selling parking spaces is not directly related to the mission of a church, the proceeds from the activity would be considered unrelated business income.

The key difference between related and unrelated business income is that the former is tax free, and the latter is taxed. Nonprofits can generate up to 20% of their income as related business income without incurring tax and/or triggering any challenges to their nonprofit status. If you are contemplating generating more than 20% of your income as related business income, please consult an attorney specializing in nonprofit tax law.

What are the categories of earned income?

We can identify three or four types of related earned income.

1. Selling your organization’s technical expertise. A great example of this is SeaChange Capital Partners, a nonprofit consulting firm that helps nonprofits navigate complex challenges. Most of the organization’s practice is pro bono, but it takes on three to four paid consulting projects with foundations and a few nonprofits. These projects are laboratories for learning that can then be applied to the rest of the practice.
2. Licensing a product your organization has created for its own use. A great example of this is CoPilot, a student information system for advisors and counselors, developed by College Forward, a near-peer coaching organization that pairs recent college graduates with students to empower the students to achieve their post-secondary goals. College Forward licenses CoPilot to colleges and universities.
3. Training and employing your clients to make products for sale. Alpha Workshops is a terrific model for this type of earned income. The organization is the nation’s first nonprofit providing decorative arts education and employment to adults with visible or invisible disabilities. The founder, Ken Wampler, had been working with Bailey House, an AIDS service provider, during the crisis of the 1980’s and early 1990’s. He observed that people with AIDS were facing severe employment discrimination. Using his background as a decorative finishes artisan, Ken conceptualized a school where people living with AIDS could be retrained as artisans and a workshop where graduates could be employed to create wallpaper and furnishings for top-flight interior design commissions.
4. Selling products related to your mission. This is the classic Girl Scout cookie program, begun in 1917, only five years after the Girl Scouts was founded, by a troop in Oklahoma that wanted to raise funds for its initiatives.

In many cases, the lines blur among these four categories, but the examples are instructive and may stimulate creative thinking for you and your team.

Stay tuned for my second blog on earned income, coming in January. Happy Holidays to all, and may 2021 be a brighter, healthier year for the planet!