For nonprofits, revenue comes from two main sources, earned income and contributed revenue:
- Earned income – money from business-like activities (exchange of goods/services).
- Contributed revenue – gifts or donations with nothing of equal value given in return.
Understanding and managing both is critical for compliance, sustainability, and mission impact.
Earned Income: Flexibility & Autonomy
Earned income is often unrestricted, giving nonprofits more control over how funds are used.
Examples:
- Membership dues
- Program or service fees
- Ticket and merchandise sales
- Consulting or management services
👉 Pro Tip: Prioritize earned-income ventures that align with your mission. A youth center running paid after-school programs makes sense; running a coffee shop might not.
Contributed Revenue: Philanthropy & Community Support
Contributed revenue might come with donor restrictions, but it can fund programs that earned income can’t cover.
Examples:
- Individual donations
- Grants (foundation or government)
- Corporate sponsorships
- Gala or fundraising event proceeds
👉 Pro Tip: Be transparent about how contributions are used — it builds donor trust and strengthens relationships.
Hybrid Revenue: Fundraising Events
Some transactions are part earned, part contributed. Example: A gala ticket costs $200, but the dinner and entertainment are worth $75.
- $75 = earned income
- $125 = contributed donation (tax-deductible for the donor)
👉 Action Step: Always split the revenue correctly in your accounting records.
Tax Considerations: UBIT Traps
Not all earned income is tax-exempt. Nonprofits must pay Unrelated Business Income Tax (UBIT) if the revenue is:
- Regularly earned and
- Not substantially related to the organization’s mission.
Example: A nonprofit hospital cafeteria = mission-related. A nonprofit selling ad space to local businesses = potentially taxable.
Finding the Right Mix
The ideal balance depends on your nonprofit’s:
- Mission – Earned ventures should advance your core purpose.
- Stage of Growth – Startups may lean on donations; mature organizations often have robust program revenues.
- Goals – Earned income brings stability; contributions fund innovation and access.
- Financial Health – Avoid over-reliance on one source; diversify for resilience.
Action Steps for Nonprofit Leaders
- Map Your Revenue Mix: What % is earned vs. contributed?
- Assess Risks: Is your organization too reliant on one revenue stream?
- Align with Mission: Ensure earned income activities support your purpose.
- Stay Compliant: Track restrictions and monitor UBIT exposure.
Bottom Line:
Earned income gives flexibility, and contributed revenue builds community. A thoughtful mix of both helps nonprofits stay sustainable, mission-driven, and resilient. Do you have questions about earned income and contributed revenue? Leave a comment below, or feel free to contact me directly. I’m happy to help!
