Are 501(c)(3) Stock Investment Profits Tax-Exempt?

Are 501(c)(3) Stock Investment Profits Tax-Exempt?
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Profits on investments made by a 501(c)(3) company can be exempt from corporate taxes. Although investing has some potential downsides for nonprofits, no laws prevent 501(c)(3) corporations from buying stock to generate revenue. Rules and practices do, however, govern how a 501(c)(3) corporation may buy and sell stock in a way that is consistent with their tax-exempt status.

Fulfilling a Mission

Nonprofit corporations receive tax-exempt status from the Internal Revenue Service because they provide a service or fill a role the government values. A 501(c)(3) requires funding to fulfill its mission. In most cases, this funding comes from donors, but some nonprofits, such as a church thrift store, get revenue from sales. As long as the nonprofit demonstrates that its income was used to fulfill its tax-exempt mission, that it comes from a responsible investment and no conflict of interest exists, the revenue is not taxable. This includes investments as much as it does sales and donations.

Meeting Fiduciary Responsibility

One reason many smaller nonprofits do not invest in stocks involves fiduciary responsibility. In a nonprofit corporation, fiduciary responsibility is the injunction against spending money that cannot be demonstrated to further the mission. As such, stocks that hold any amount of risk are often a concern for 501(c)(3) nonprofits. A 501(c)(3) nonprofit's purchase of stock must be demonstrated to be worth the revenue it is intended to generate.

Conflicts of Interest

Since any investment must meet the fiduciary responsibility standard, it also must not include any conflict of interest. This means board members and corporate officers cannot benefit from the purchase or sale of stock by a nonprofit. Similarly, no one involved in the purchasing decision can be a major stockholder in the company being considered for investment. Many nonprofit corporations entrust their investments to a blind trust to avoid the appearance of conflicts of interest, while others engage a qualified management company and give it decision-making power over the nonprofit's investments.

Protecting Tax Status

The bulk of the nonprofit's work must be devoted to executing its mission. If that mission appears to be undermined by any of the organization's fundraising efforts, or if more resources are devoted to revenue generation than to fulfilling a mission, the IRS can revoke the 501(c)(3)'s tax-exempt status. A nonprofit that's considering stock investments as a way to raise funds can protect itself from this outcome by documenting its efforts to fulfill its mission and its fundraising efforts.