*disclaimer – I am not an attorney, a CPA or anyone you would consider an expert with advice on this subject you would pay for. The following is merely some observations and opinion on those. If you need definitive advcie please seek out the necessary professional for an opinion**
Okay, now that we are through the disclaimer we can discuss something that is discussed with every non-profit thrift store we work with. It goes something like this:
“We have to be very careful about selling brand new non-donated items! It’s an IRS thing so we feel it’s too risky. New items can only account for 15% or less of our annual revenue. So we would rather just not do it!”
Wait, did I hear you correctly? That doesn’t make any sense to me……
And that was out first introduction to something called UBIT; the Unrelated Business Income Tax. (sounds like a nasty little bugger doesn’t it!)
But I’m jumping ahead. Let me tell you how this all came about…
I need to give you some quick history on part of our journey so far. All of us at American Bedding Solutions came from the private sector. One evening over dinner we decided we could use our expertise from the private sector to do some good in the world and help non-profits do a little more of what they are good at. Our thoughts were this: If we put a mini version of our existing business in their store and left the large profits for our partner stores, then they would have our expertise (no learning curve), and a high margin/high volume product to add to the bottom line of their thrift store. It’s a Win-Win-Win!
It seemed like a good idea then…. and with the help of many organizations we have refined our model and continue to make it better. It has generated well over $1,000,000 in sales for the stores we have worked with.
At first we figured everyone understood this “issue” and maybe we didn’t, since we were the new kids on the block. Fast forward a bit, and we began realizing that we were mistaken; everyone didn’t understand it thoroughly! We kept hearing about this “15% issue” over and over, so we finally asked a few CFO’s if they could point us to the specific documentation on it. We wanted to understand it as well. After all, it was part of our ongoing conversations. Guess what we found………… nobody knew where to send us!
I know, I know…… you are probably thinking the same thing I was: “You are using this as a guideline for your business, but you don’t know where to find the guideline?” (Actually I wondering if it was a real guideline or just something anecdotal that had reached “factual” proportions)
It was starting to seem like this “guideline” was the mythical Unicorn or Bigfoot of the nonprofit thrift world.
Then it hit me…..
Someone has to know, right? And we need to know because it is part of our discussions! (this is probably the same feeling that drives people to search for Bigfoot!) So we went on the hunt for ANY documentation we could find. Guess what? With the help of some very smart people we found it! (Thank you Wade and Merv!)
You can read all about it right HERE (and I would HIGHLY recommend doing it if you have trouble falling asleep!)
What this all boils down to is…
If you want to avoid paying income tax on the revenue generated from the sales in your thrift store or other ventures, then you need to follow the generally accepted guidelines for what you sell. Though there are no specific related to thrift store sales (there are many awesome resources of you search UBIT in google), the idea is that 85% of all revenues are supposed to be directly related to your core mission. What does THAT mean exactly? You will need to ask that question of someone who charges much more than I do for this blog to get a good answer…… but inside of all this messy guessing lies the real problem……
In many cases, your concern over the 15% is driving your business into the ground! Would you buy a car and then refuse to drive it because of the cost of gas?
WWGWD (What Would GoodWill Do)
Many in the thrift world do not look on Goodwill with appreciation. There are many reasons I have heard, but one fact remains: Goodwill is winning the battle for customers, donations and locations! Many thrifts struggle to be productive and profitable. They struggle with staffing issues, donation volume and image challenges, but Goodwill is rolling out stores like crazy….. not just new stores, but BRAND NEW stores being built from the ground up. A recent conversation I had with a friend sums it up:
“When I want inexpensive clothing I shop at Goodwill because I can find the clothes I want, the customer service is great and the overall experience is pleasant…”
In the recent visits I have mad to our local Goodwill stores I noticed that they had a very large amount of brand new items for sale. I saw everything from shoes to sheets, pans to belts and everything in between.
How can Goodwill be doing this but everyone else cannot? They are all non-profit organizations so they play inside the same set of rules……… I don’t know for certain because I have never “seen behind the curtain” of Goodwill, but I can make an educated guess and so can you!
The only answer I can come up with is that they have made the decision that UBIT isn’t going to limit their business. They have made the business decision to sell more and pay income tax, over selling less (making less) and remaining tax exempt. Why would they choose this? Because they KNOW that they can begin in enough new items to outsell the income tax they pay. By carrying the new items they aren’t just increasing their revenue a little….. they are increasing it A LOT!
A long time ago someone I respected said this to me: “Bruce, never take advice from someone who isn’t doing better than you, at whatever it is you need advice about!” I never forgot that and have used that advice often when choosing which direction to go in my life. My personal opinion is that this applies to all business as well. For example, if Goodwill is the Kmart brand of thrifts, then why are you not modeling and duplicating what they do?
Again, I am not an accountant or attorney who specializes in these issues, but from the outside it looks like many non-profit thrifts are more concerned about “not exceeding the 15% threshold” than doing everything they can to grow their business.
REMEMBER: Even a non-profit is a business, and the more efficient you are, the more revenue you generate, the more lives you impact forever!
Make it a great day!