Can Nonprofits Invest in Stocks?
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.
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.
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.