Behavior of nonprofit organizations in for-profit markets: The curious case of unprofitable revenue-raising activities

When nonprofit organizations in the U.S. engage in activities that are "substantially related" to their legal mission they pay no profits taxation, but profit from "unrelated business" (UB) activities is taxed. Since UB activity has no apparent justification other than to generate revenue, we attempt to explain why no profit is so frequently reported. We examine the accounting allocation of joint costs, such as depreciation, between the taxed, and untaxed activities in six industries -including health, education, and the arts - and also the specific kinds of UB activities undertaken. We find evidence that the reported unprofitability of UB activity masks true profitability.