January 10, 2011
Does Unrelated Business Activity Detract from the Charitable Goal?
One would think that in an age of severely restricted donations and government funding, nonprofits would logically step up their unrelated business activities in an effort to generate funds for their charitable goals. Now, though, one researcher finds that doing so only exacerbates the problem. According to a recent report authored by Rebecca Tekula of the Wilson Center for Social Entrepreneurship at Pace University, nonprofits that engage in unrelated business activity do so at the expense of their charitable goal.
By pursuing income-related activities such as selling donors' contact information to third-party marketers and running online shops, nonprofits have diverted income away from service activities, says Rebecca Tekula, the report's author.
"Organizations that spend money and divert resources to other activities do so at the detriment of the homeless, domestic violence victims and people who need these services," says Ms. Tekula, executive director at the Wilson Center for Social Entrepreneurship at Pace University. "Social enterprise may be an innovation," she says, but it is one that can tempt nonprofits into a substantial "mission distraction."
The Wall Street Journal wrote about the report (subscription required) in its November 4, 2010 issue. If the report is correct, engaging in unrelated business activities not only jeopardizes tax exempt status (if the activity is substantial enough) but it also accomplishes exactly the opposite of what is intended. Rather than funneling money into charitable causes, unrelated business activities divert funding from charitable causes. The UBIT has always been justified as a tool to level the playing field between for-profit and tax exempt entities. Now, it seems the UBIT might also be effective in ensuring the more effective accomplishment of the chartiable goal.
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