Can a Non-Profit be part of an affiliate program and receive passive income from the sale of third-party products? If the answer is yes, BooksOnline.Club offers non-profits one of their greatest opportunities to help fund their non-profit activities. We’ll answer two questions. First, does the IRS approve of non-profits signing up as affiliates to receive a percentage of the sales of third party products or services? And secondly, if that is legally approved under the IRS code, what are the details and how can a non-profit take advantage of such an extraordinary opportunity to dramatically increase their donations through a legitimate affiliate program?

Nonprofit Organizations and Affiliate Income: Legal Considerations, IRS Requirements, and Practical Applications

Abstract: As nonprofit organizations seek to diversify their funding strategies in an increasingly competitive philanthropic landscape, affiliate income from third-party product sales has emerged as a potentially valuable revenue stream. This article provides a comprehensive analysis of how nonprofits can legally earn affiliate income, outlines relevant IRS requirements and limitations, and offers examples of nonprofit organizations currently leveraging affiliate relationships. Attention is paid to the distinction between related and unrelated business income, the application of Unrelated Business Income Tax (UBIT), and best practices for maintaining compliance with IRS regulations.

Introduction: In the digital economy, affiliate marketing has become a standard practice for revenue generation across industries. Nonprofit organizations, though traditionally reliant on donations, grants, and fundraising events, are increasingly exploring affiliate partnerships as a supplementary income stream. An affiliate arrangement typically involves promoting third-party products or services in exchange for a commission on resulting sales. While permissible, such activity must be navigated carefully to maintain the nonprofit’s tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3).

1. Legality of Affiliate Income for Nonprofits

The IRS permits 501(c)(3) organizations to engage in income-generating activities, provided the income does not compromise the organization’s primary exempt purpose. Affiliate marketing falls into this category, and nonprofits can receive commissions from third-party product sales under such arrangements. However, this income may be classified as “unrelated business income” if it does not substantially relate to the nonprofit’s core mission.

IRS Reference:

• IRC §512(a)(1) defines unrelated business income as income from a trade or business that is regularly carried on and is not substantially related to the organization’s exempt purpose.

2. Unrelated Business Income Tax (UBIT)

Affiliate income that qualifies as unrelated business income (UBI) is subject to the Unrelated Business Income Tax (UBIT). The purpose of UBIT is to prevent unfair competition between tax-exempt and for-profit organizations and to ensure that nonprofits do not use their tax-exempt status to subsidize commercial ventures unrelated to their mission.

Key Considerations for UBIT:

• Regularly Carried On: The activity must show frequency and continuity similar to comparable commercial endeavors.
• Trade or Business: It must involve the sale of goods or services.
• Unrelated to Exempt Purpose: The activity must not contribute importantly to the organization’s exempt purpose.

IRS Reference:

• IRS Publication 598: Tax on Unrelated Business Income of Exempt Organizations

3. Exceptions and Exclusions to UBIT

Certain exceptions may apply, allowing nonprofits to avoid UBIT liability even when earning affiliate income:

• Volunteer Labor: If substantially all the work is performed by volunteers, income is excluded.
• Convenience Exception: Income generated for the convenience of members, students, patients, or employees may be exempt.
• Sale of Donated Merchandise: Sales involving donated goods are not subject to UBIT.

Importantly, income derived from passive sources such as interest, dividends, and royalties is generally excluded. However, affiliate income is typically not considered passive because it involves active promotion.

IRS Ruling Example:

• Rev. Rul. 81-178 addressed a tax-exempt organization promoting credit cards and ruled that income received was taxable because it was not substantially related to the exempt purpose.

4. Mission Alignment and Best Practices

Nonprofits can reduce UBIT exposure by aligning affiliate activities with their charitable mission. For instance, a health-focused nonprofit promoting fitness equipment or nutritional supplements consistent with its health advocacy would have a stronger case for mission-related income than one promoting unrelated consumer goods.

Best Practices Include:

• Clearly disclosing affiliate relationships to the public.
• Maintaining documentation that links the promoted product to the exempt mission.
• Tracking income and expenses separately for affiliate activities.
• Consulting a tax advisor before entering large-scale affiliate arrangements.

5. Reporting Requirements

All affiliate income must be reported on IRS Form 990, the annual information return for tax-exempt organizations. If UBIT is incurred, the nonprofit must also file IRS Form 990-T and pay the applicable tax.

Key Forms:

• Form 990: Annual reporting for tax-exempt organizations.
• Form 990-T: Used to report and pay UBIT.

Failure to report UBI accurately can result in penalties or jeopardize the organization’s tax-exempt status.

6. Real-World Examples

A. Girls on the Run International: This nonprofit has promoted athletic gear and training tools consistent with its fitness-based mission. While not publicly advertised as an affiliate program, such relationships may involve referral-based partnerships that generate revenue.

B. GreaterGood.org: This organization supports causes through online stores where nonprofits receive a portion of sales revenue. Nonprofits enrolled through GreaterGood’s “Click to Give” program may indirectly receive affiliate-like income.

C. Independent Health Nonprofits:  Some health-based organizations participate in affiliate programs with supplement companies, fitness platforms, or health-monitoring apps. Income is often mission-aligned and may be considered related if educational or preventative in nature.

D. Nonprofit Technology and Fundraising Tools:  Nonprofits can also earn affiliate income by referring peer organizations to platforms like Donorbox, GiveWP, or FundraiseUp. While these are B2B referrals, they qualify as affiliate commissions and should be disclosed and reported accordingly.

7. Transparency and Public Trust

While affiliate income can support nonprofit missions, transparency is essential. Ethical considerations include:

• Disclosing the relationship under FTC guidelines.
• Avoiding endorsements that conflict with organizational values.
• Ensuring no personal benefit is received by staff or board members from affiliate revenue.

FTC Guidelines Reference:

• 16 CFR Part 255: Guides Concerning the Use of Endorsements and Testimonials in Advertising

Conclusion

Affiliate marketing presents an innovative revenue stream for nonprofits when executed within legal and ethical frameworks. By aligning affiliate efforts with mission goals, maintaining transparency, and complying with IRS regulations, nonprofits can successfully diversify funding without compromising their tax-exempt status. Careful planning, documentation, and compliance are critical to ensuring that affiliate income contributes to long-term organizational sustainability.

References:

• Internal Revenue Code §512(a)(1)
• IRS Publication 598
• Rev. Rul. 81-178
• FTC Guidelines (16 CFR Part 255)
• IRS Forms 990 and 990-T
• Donorbox Affiliate Program: https://donorbox.org/affiliate
• ShopRaise Charity Affiliate Programs: https://shopraise.com
• GreaterGood: https://greatergood.org
• BooksOnline.Club: https://BooksOnline.Club

This article is intended for informational purposes only and does not constitute legal or tax advice. Organizations should consult qualified tax professionals before implementing affiliate strategies.