Differential taxation of nonprofits and the commercialization of nonprofit revenues

Joseph J. Cordes, Burton A. Weisbrod

Research output: Contribution to journalArticlepeer-review

55 Scopus citations


The effects of the favorable tax treatment of nonprofit commercial activities are best understood in a framework that explicitly accounts for a number of interactions. These involve differential taxation of nonprofits and for-profits and of nonprofits' "related" and "unrelated" activities; the preferences of nonprofit executives who may be averse to commercial activity; donors whose giving may be sensitive to nonprofit organization commercial activity; and cost-complementarities between nonprofit core mission-related activities and their secondary money-raising efforts. Differential taxation encourages nonprofits to pursue otherwise avoided commercial ventures by providing excess financial returns that nonprofits can exploit because of their tax-exempt status. Data from the 1992 Statistics of Income (SOI) public use file of Internal Revenue Service (1RS) Form-990 returns indicate that the propensity of nonprofit organizations to undertake both tax-exempt and taxable activities depends on their primary mission-related output and size, the relative importance of government versus private contributions, and the size of the excess return created by differential taxation of nonprofit and for-profit business. Additional analyses of SOI data also show that organizations that engage in taxable commercial activities are likely to allocate joint costs in ways that reduce, and in most cases eliminate, their taxable income.

Original languageEnglish (US)
Pages (from-to)195-214
Number of pages20
JournalJournal of Policy Analysis and Management
Issue number2
StatePublished - 1998

ASJC Scopus subject areas

  • General Business, Management and Accounting
  • Sociology and Political Science
  • Public Administration


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