Can nonprofits sell products? Understanding the rules

Nonprofit organizations are constantly looking for new and creative ways to raise funds. One effective method is by selling vetted, relevant products to their audience. While we usually think of nonprofits as organizations that rely on donations and grants, selling merchandise can be a game-changer. 

Entering retail isn't as simple as it sounds—it comes with its own set of rules and best practices. 

In this blog, we'll guide you through these regulations, share practical tips, and introduce you to Gelato's print on demand services, which are perfect for nonprofits creating custom merchandise without any upfront costs. So, can nonprofits sell products? For many, the answer is yes—now let’s find out how!

• A nonprofit organization can sell products if its activities align with its charitable missions and comply with legal regulations.

• Revenue from product sales can enhance nonprofit sustainability, increase brand awareness and financial gain, and engage supporters.

• Understanding and managing Unrelated Business Income Tax (UBIT) is crucial to maintaining tax-exempt status while selling products.

• Adhering to IRS regulations and regularly evaluating product sales ensures compliance and mission alignment.

• Utilizing services like Gelato's print on demand can help nonprofits create custom merchandise with minimal upfront investment to generate revenue.

Yes, nonprofits can sell products to generate income. This can be an effective way to supplement traditional funding sources like donations and grants. 

However, the products must align with the organization’s mission and values. Selling items that reflect the nonprofit’s purpose and ethos not only makes the merchandise more appealing to supporters but also reinforces the organization’s goals and beliefs. 

Aligning product sales with the mission ensures that every item sold is a promotional tool for the nonprofit, effectively educating buyers about the organization's cause. For instance, a wildlife conservation nonprofit might organize a one-week fundraising effort to sell eco-friendly products or wildlife-themed apparel.

When supporters purchase merchandise that resonates with your mission, they become walking ambassadors of your cause and generate income along the way. Ensuring that your products are mission-centric helps build a stronger connection for supporters, encouraging ongoing advocacy.

For nonprofits, selling products offers various advantages to bolster revenue and enhance community engagement. Let’s dive into how this strategy can benefit your organization.

1. Generate additional revenue

Product sales can help nonprofits cover operational expenses, fund specific projects, or expand their programs. 

By selling branded merchandise and related items, organizations can tap into new income streams that go beyond traditional fundraising efforts. This extra revenue can be particularly beneficial during economic downturns when donations might dwindle. Moreover, the funds raised can help promote long-term sustainability.

2. Increase brand awareness

Custom merchandise acts as mobile advertising for your nonprofit. Each t-shirt, mug, or tote bag featuring your logo spreads your message whenever it's used. This not only increases visibility but also deepens the emotional connection supporters have with your cause. 

Leveraging Gelato's localized production, you can create high-quality, branded products swiftly and cost-effectively.

3. Engage and grow your supporter base

By selling products, you can engage your existing supporters and attract new ones. Offering unique, mission-aligned merchandise creates a sense of belonging and pride among your local audience. It also provides supporters with tangible ways to showcase their commitment to your cause. 

Regular updates on new products and limited editions can keep your community excited and engaged, building a deeper connection with your organization. 

4. Create a sustainable fundraising stream

Diversifying your revenue streams through product sales can help create a sustainable source of funds for your non-profit organization. 

Unlike one-time donations, merchandise sales can provide a continuous flow of income since supporters can purchase items year-round. This steady revenue can be used to fund ongoing projects and operational costs, reducing the reliance on grants and sporadic donations. 

5. Promote your mission and values through merchandise

Merchandise isn't just about generating revenue—it also acts as a powerful digital megaphone for amplifying your nonprofit's mission and values. 

Each item sold is a conversation starter, spreading awareness and sparking engagement. Custom products can be designed to reflect your organization's ethos, forming a deeper connection with your community. Whether it's through apparel, accessories, or eco-friendly products, your supporters become walking ambassadors.

Unrelated business income (UBI) refers to the income generated from any trade or business activities that are not substantially related to the nonprofit’s exempt purpose, even if the income is used to further the organization’s charitable cause. 

This means that while your nonprofit can earn money from various activities, if these activities do not align closely with your core mission, the income may be considered unrelated and taxable.

What constitutes unrelated business income?

Revenue generated from activities unrelated to a nonprofit's mission is considered unrelated business income and can potentially result in tax obligations. Understanding what constitutes such income is crucial for maintaining tax-exempt status. Here's what you should know:

• Income from commercial activities is not tied to the nonprofit’s mission.

• Income is generated from activities that are regularly carried out, akin to a for-profit business.

• Examples: Operating a café unrelated to the nonprofit's educational purpose.

Implications of UBI

UBI can complicate the financial outlook for nonprofits if not properly managed. Therefore, it's essential to understand its implications for maintaining your organization's tax-exempt status. Here's what you need to know:

• Tax liability: Nonprofits must pay the Unrelated Business Income Tax (UBIT) on income from unrelated activities, reducing the overall funds available for the mission.

• Reporting requirements: Organizations must report UBI separately, which may require more intricate accounting and financial reporting.

• Frequency and continuity: The IRS considers how frequently and consistently an activity is conducted when determining if it qualifies as unrelated business income.

While nonprofits enjoy tax-exempt status, it's essential to understand a UBI corporate tax rate can impact that status when engaging in certain income-generating activities. Here's how: 

1. Nonprofits maintain their tax-exempt status when they generate unrelated business income, but they must pay UBIT on this income.

2. Proper reporting and paying UBIT ensures compliance and avoids penalties, protecting the organization's tax-exempt status.

When nonprofits venture into product sales, it's crucial to understand the reporting requirements for unrelated business income. Here's a quick overview: 

Reporting unrelated business income

Any revenue generated from a trade or business activity not substantially related to the organization's exempt purpose must be reported as unrelated business income (UBI). Nonprofits need to file IRS Form 990-T to report this income.

There are various rules that govern tax-free basis and tax exemption when certain types of income can be excluded from UBI. These include:

• Passive income, such as dividends, interest, and royalties

• Income from activities conducted primarily for the convenience of members, students, patients, officers, or employees

• Sales of donated merchandise

Role of the Internal Revenue Service

The IRS closely monitors nonprofit activities, ensuring compliance with tax exemption rules and UBI regulations. Nonprofits must:

• Keep detailed records of all income and related expenses

• Regularly evaluate whether their activities constitute UBI

• Ensure that activities align with their charitable mission to maintain tax-exempt status

By adhering to these guidelines, nonprofits can successfully leverage product sales to support their missions while remaining compliant with IRS regulations.

Aligning your nonprofit's product sales with its mission is crucial for maintaining tax-exempt status and ensuring the trust of your supporters. 

Here are two examples of income-generating activities that align with a nonprofit’s mission:

• A nonprofit focused on environmental conservation could sell reusable shopping bags or eco-friendly water bottles branded with their logo and messaging.

• An organization that promotes literacy might generate income by selling branded bookmarks, journals, or educational resources that reinforce its mission.

Here are some practical tips to follow when aligning your nonprofit's product sales with its mission: 

1. Ensure relevance: Choose products that reflect your organization's mission and values. For example, if your nonprofit focuses on environmental conservation, you might sell eco-friendly merchandise or reusable items.

2. Mission-centric activities: Sell products that directly support your cause. Examples include selling educational materials for a literacy organization or handcrafted products made by the community you support.

3. Transparency with supporters: Clearly communicate how proceeds from product sales will be used. This builds trust and encourages continued support.

4. Regular evaluation: Regularly reassess your product sales strategy to ensure compliance with IRS regulations. Maintain detailed records of sales and revenue and consult with a nonprofit accountant to address any potential issues.

5. Educational integration: Incorporate educational elements into your product offerings. For instance, a museum could sell educational kits or books related to its exhibits.

Keeping product sales aligned with your mission not only supports compliance but also strengthens your nonprofit's brand identity. Regular evaluation and transparency with supporters and advocates are key to sustaining effective and mission-driven fundraising efforts.

Are you looking to create custom merchandise without taking on the risk of upfront costs? Gelato's print on demand services could be the solution you need.

Here are some benefits of using Gelato for your nonprofit's merchandise needs:  

• No upfront costs: With Gelato, you don’t need to invest in large quantities of products. Simply order what you need when you need it.

• Global reach: Gelato’s network operates in over 30 countries, ensuring supporters can access your merchandise no matter where they are.

• Eco-friendly practices: Gelato focuses on reducing waste and carbon emissions by producing items closer to your supporters.

• Scalability: Whether you need 10 or 10,000 items, Gelato's flexible platform scales with your fundraising needs and efforts.

• Expert design tools: Create standout designs using Gelato’s intuitive design interface or integrate with tools you already use.

Using Gelato enables nonprofits to create custom merchandise tailored to their mission and supporters without the financial risk involved with traditional bulk orders. This means you can focus on what really matters—promoting your cause and engaging with your community rather than managing inventory.

Now that you've designed some amazing merchandise that aligns with your nonprofit's mission, let's dive into promoting and selling it to the world. Here are some key strategies to leverage social media platforms and ecommerce stores, and how Gelato can empower your efforts. 

Spreading the word on social media platforms and leveraging a storefront

Social media platforms and ecommerce stores offer immense potential for reaching a broad audience and driving sales. Here’s how you can make the most of these platforms: 

• Choose the right platforms: Identify which social media platforms your target audience frequently uses. Popular choices include Facebook, Instagram, Twitter, and LinkedIn. Tailor your content strategy to each platform's strengths.

• Interactive content: Create engaging and interactive content using stories, polls, live streams, and videos. This creates a sense of community and encourages engagement with your posts.

• Utilize ecommerce tools: Platforms like Shopify, Etsy, and WooCommerce  are user-friendly and integrate easily with your social media accounts, enabling easy purchase processes for your supporters.

• Create a seamless checkout experience: Include clear and compelling calls to action in your posts. Direct your audience to your online store and make the purchasing process as straightforward as possible.

Tips for increasing brand awareness and reaching new audiences 

To grow your audience and amplify your reach, consider the following methods: 

1. Hashtag strategy: Use relevant hashtags to increase the visibility of your posts. Research trending hashtags within the nonprofit sector and incorporate them into your content.

2. Collaborations and partnerships: Partner with influencers, brands, or other nonprofits that fit well with your mission. Collaborations can reach new audiences and introduce them to your cause.

3. Email marketing: Leverage your email list to notify supporters about new merchandise, special offers, and exclusive deals. Personalized emails can drive greater engagement and sales.

4. User-generated content: Ask your fans to share pictures or stories about your products. Reposting their content not only acknowledges their support but also provides social proof to others.

5. Tell your story: Don't just sell products; sell your mission! Craft compelling narratives that connect your merchandise to the impact it helps create.

Your most loyal supporters are your strongest advocates. Engage them on social media to boost merchandise sales by offering exclusive previews and special discounts, sharing engagement stories, creating a feedback loop, and publicly recognizing their contributions. These actions make them feel valued and strengthen their connection to your mission.

By blending your mission with meaningful, non-profit merch, you can unlock a powerful fundraising strategy. From boosting revenue to amplifying your cause, the benefits are invaluable. With a clear understanding of the legal landscape, you can confidently navigate the process with ease.

Gelato’s print on demand services offer an exceptional solution for nonprofits looking to design and sell custom merchandise. With Gelato, you can create high-quality, personalized products such as t-shirts, mugs, wall art, phone cases, tote bags, and photo books without the hassle of upfront costs or large inventory. 

Our global production network ensures timely deliveries and reduced environmental impact, keeping your fundraising efforts efficient and sustainable. Additional features like API integrations, flexible subscription plans, and localized production make it easier than ever for your nonprofit to reach new supporters and raise funds effortlessly.

Ready to take your nonprofit’s fundraising to the next level? Sign up for Gelato and choose a subscription plan that suits your needs!