The nonprofit sector may operate without shareholders, but that doesn’t mean it operates without pressure. Across the United States. Nearly 2 million nonprofits are actively working to deliver critical services, solving problems the private sector won’t touch. Yet, almost half og these organizations struggle to secure the funds they need to support their programs. While there may be some irony in the fact that even nonprofits need funds, the truth is that survival isn’t guaranteed, even for these organizations.
Growth becomes a necessity for nonprofits as it is the only way to offset some of the uncertainties they face as a result of rising operating costs, fluctuating donations, and increased demand. Ultimately, everything comes at a cost:
- Scaling programs
- Hiring more staff
- Increase outreach
- Diversifying revenue streams
No matter how essential these steps are to the survival of nonprofits, they also tie into business growth strategies. While this may seem unexpected, in reality, growth will also drive tax liabilities, no matter your type of business. This is also true for nonprofits. When they grow, they are more exposed to taxes. Naturally, they retain a tax-exempt status to protect their mission-related income. But growth introduces new revenue sources and considerations that the IRS doesn’t always classify as charitable. In short, non-profit organizations are exposed to liabilities they never budgeted for.
The challenge is not whether non-profits should grow. It is about how they approach growth without triggering financial penalties and tax red flags. That’s exactly where Unit4 can help.
Meet Unit4
Unit4 is not just another ERP solution repurposed for nonprofits. It is a platform intentionally engineered for faith-based and mission-driven operations that don’t meet the standard of commercial enterprises. The ERP is designed to provide purpose-led organizations with the technology solutions that evolve with them. Unit4 is a cloud-based ERP system capable of supporting nonprofits as they expand their programs and manage diversified revenue streams.
Unit4 is different from many ERPs that prioritize profit metrics and corporate workflows. Instead, it focuses on the reality of nonprofits, ensuring finances, donor databases, payroll solutions, and workforce management are consolidated into one centralized platform. This means that at a nonprofit’s level, there is full visibility of what is going on, no matter how complex the different workflows may be.
What does it matter? Because nothing happens in a straight line in the nonprofit sector. For a start, funding tends to fluctuate, which means both strategies and staffing need to adjust. That’s why Unit4 brings a modular architecture that adapts alongside, so organizations always have the right tools to remain transparent and in control even when their responsibilities evolve.
Taxes Nonprofits May Pay As They Grow
Tax-exempt status protects mission-related income, but it doesn’t eliminate every tax responsibility. As nonprofits grow, they can unintentionally trigger liabilities that were never part of the original operating plan.
UBIT – Unrelated Business Income Tax
UBIT applies when nonprofits earn income from a regularly conducted business activity that is substantially related to their mission. Even when the revenue is intended to support the mission, it can become taxable.
What kind of revenue can trigger it?
- Running a commercial gift shop
- Selling advertising space
- Offering paid consulting services or classes that are not related to the mission
Payroll Taxes
Growing nonprofits tend to expand their teams. While they are tax-exempt from federal income taxes, nonprofits are not exempt from payroll taxes. Indeed, hiring more employees means they have more obligations for social security, Medicare, and federal unemployment tax. If staff growth isn’t tracked properly, the risks of unexpected liabilities can accumulate fast.
Executive Compensation Excise Tax
The Tax Cuts and Jobs Act introduced a 21% excise tax on compensation above $1 million for the five highest-paid employees at some nonprofits. So, for organizations that are competing for top leadership talent, it’s essential to ensure the executive pay packages don’t accidentally cross this threshold.
State and Local Tax
Tax exemptions vary widely from one state to another. So for organizations that expand into new regions, this can trigger new taxes. It’s worth noting that growth across geographies bring more compliance complexity.
Compliance Scrutiny
Large nonprofits are more noticeable, and they tend to face more IRS scrutiny. So, errors in reporting are less and less tolerated as you grow.
How Unit4 Keeps Nonprofit Taxes Under Control
Unit4 eliminates tax liability uncertainties by providing nonprofits with the tools to understand, track, and manage the financial impact of growth.
Unit4’s unified financial architecture helps see where the income comes from, how it’s classified, and whether it risks crossing into UBIT territory. This means that organizations can receive real-time reporting on activities that may require reporting, so they can adjust, prepare, or restructure accordingly.
Payroll expansion is another area where the platform makes a difference. Unit4 automatically calculates payroll obligations as teams expand. It monitors tax liabilities, identifies compensation changes that may become problematic, etc. This proactive monitoring ensures that nothing gets overlooked.
Additionally, Unit4 supports state and local compliance through centralized operational and geographic data. The system automatically flags nexus requirements and varying exemptions when nonprofits expand into new regions, jurisdictions, and even income generation. That way, the organization can prepare.
Unit4 – Pros & Caveats
For nonprofits, clarity is the most important benefit of adopting Unit4. By centralizing all data, the platform instantly eliminates the guesswork that typically surrounds nonprofit growth. Organizations don’t run the risk of unknowingly triggering tax liabilities because Unit4 enables them to monitor their revenue:
- Where it comes from
- How it is allocated
- Whether it relates to the core mission or not
This means there’s no bad surprises.
Additionally, the intuitive interface and modular design ensure the team can be on board from the start to track and manage growth. So, there’s no unflagged responsibility or unclear liability. It is easy to use and easy to gain a full overview of what is going on. In other words, for bigger nonprofits, it’s the ability to be audit-ready at all times.
Naturally, Unit4 isn’t a magic wand. To make the most of the consolidation feature, organizations need to invest time and effort in the initial setup. Additionally, its features make it more suitable for mid-sized and larger nonprofit institutions, as smaller organizations may not require the same level of support.
That being said, for nonprofits in the process of scaling up, Unit4 delivers what few ERPS can do, which is operational growth without tax-related surprises.
Disclaimer: This article is for general information only. It is not legal, tax, or financial advice. Nonprofits should talk to a qualified tax professional or advisor before making decisions about taxes, growth, or software tools. Information in this article may change and may not apply to every organization.
Dorothy I. Johnson is the heart and soul of Flash Flyer Blog’s writing team. Dorothy loves storytelling and finds the extraordinary in everyday life. She has a unique voice for sharing travel stories, tech trends, wellness tips, and food finds. Her relatable style makes complex ideas easy to grasp. She also turns simple moments into captivating stories. Dorothy’s background and curiosity inspire her to make content that connects with readers. They can find either practical tips or new viewpoints in her work. When she’s not writing, she likes to explore new places. She experiments in the kitchen or dives into a new personal growth book.
