Current Issues of Nonprofit Corporation Finance: A Partial Alternative to Cross-Subsidization in the Commercial Arena

Abstract

This paper deals exclusively with the issues surrounding the nonprofit sector of the economy. It looks at the characteristics of the nonprofit sector, market rationale for its existence, the issues surrounding federal tax exemption, and the debate about unfair competition between tax-exempt nonprofits and for-profit firms within the commercial arena. A brief description of the responsibilities of a nonprofit finance manager will also be presented. It is this relationship between the nonprofit corporation and its financial manager that merits the most discussion. As government funding for pubic services is further cut, the role of the nonprofit sector is increased; however, their current funding simply cannot support much expansion. Many nonprofits have resorted to entering the commercial sector to cross-subsidize their central missions with the profits earned. This has caused considerable concern among entrepreneurs, especially those initiating small businesses. While the government has instituted an unrelated business income tax (UBIT) that applies to all profits received from business not directly related a nonprofit's central mission, many members of the business community still say that nonprofits have an unf~ir competitive edge. An alternative source of revenue for nonprofits would remove the incentive for nonprofits to enter the commercial arena, thus allowing them to concentrate on their central mission. Seemingly the interests of both sectors and society as a whole would be catered to if an alternative income source could be realized.