Jurriaan Huting/iStock/Getty Images
Nonprofits often develop diverse revenue streams, such as with grants from private foundations and government, one-time public donations and special-event fundraisers. Nonprofits, though, must conform to government regulations in order to retain their 501(c)(3) tax-exempt status and avoid paying penalties. As long as their activities stay within government guidelines, tax-exempt nonprofits can invest in stocks without paying any taxes on stock dividends or gains on sales.
Use Profits Well
As IRS rules state, 501(c)(3) nonprofits must be organized and operated for goals that are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. Although nonprofits may make a profit from stock investments, they aren't permitted to use profits to enrich the organization's management or other individuals. Instead, they must plow proceeds back into the nonprofit for its work. Otherwise, the Internal Revenue Service can impose an excise tax on the nonprofit's management and others who have benefited from any profit-sharing.
Creating a Policy
Nonprofit staff and board members should first develop an investment policy that covers issues such as the role of investments in supporting the nonprofit's work, legal requirements affecting investments, how much risk is acceptable and how much return can be spent or reinvested. They should seek assistance from a CPA, if necessary. Tax-exempt nonprofits report income from stock investments on Line 10 of IRS Form 990, an annual information tax return they file annually.
Located in the mid-Atlantic United States, Elizabeth Layne has covered nonprofits and philanthropy since 1997, and has written articles on an array of topics for small businesses and career-seekers. An award-winning writer, her work has appeared in "The Chronicle of Philanthropy" newspaper and "Worth" magazine. Layne holds a Bachelor of Arts in journalism from The George Washington University.