How Do Nonprofits Make Money? Revenue Sources and IRS Rules Explained

A nonprofit organization is not the same as a charity, though many charities are nonprofits. The IRS recognizes several types of tax-exempt organizations under Section 501(c) of the Internal Revenue Code, with 501(c)(3) being the most common for public charities and private foundations.

The defining feature of a 501(c)(3) organization is that it may not distribute earnings to private shareholders or individuals — surplus revenue must be reinvested into the mission. This does not mean nonprofits cannot earn revenue. It means any money earned must support the organization's exempt purpose rather than enriching owners or investors.

Individual donations are typically the largest revenue source for public charities. Donors who itemize deductions may deduct contributions to qualified 501(c)(3) organizations, subject to adjusted gross income (AGI) limits — generally up to 60% of AGI for cash gifts to public charities as of 2026. This tax benefit encourages charitable giving and is a key reason donors choose registered nonprofits.

Corporate giving may take the form of direct cash donations, in-kind contributions (goods or services), or sponsorships. Sponsorships that involve acknowledgment of the business — rather than advertising — typically qualify as charitable contributions rather than taxable unrelated business income.

Many nonprofits receive grants from federal, state, and local government agencies to deliver public services. These grants typically come with compliance requirements, reporting obligations, and restrictions on how funds may be used. Failure to comply with grant conditions may require the organization to return funds.

Private foundation grants are another major source. Foundations are themselves 501(c)(3) organizations required to distribute at least 5% of their investment assets annually to charitable causes. Public charities often actively cultivate relationships with foundations whose mission areas align with their programs.

Many nonprofits charge fees for services related to their exempt purpose. A nonprofit hospital charges patients, a nonprofit school charges tuition, and a nonprofit job-training program may charge course fees. These revenues are generally not taxable as long as the activity is substantially related to the organization's exempt purpose.

When a nonprofit earns income from activities unrelated to its mission — such as a charity running a for-profit restaurant — that income is subject to Unrelated Business Income Tax (UBIT). Nonprofits must track and separately report unrelated business income on IRS Form 990-T.

Larger nonprofits often hold an endowment — a pool of invested assets where the principal is preserved and only investment returns are spent on operations. Endowment income may come from dividends, interest, and capital gains. An IRA or similar tax-advantaged account may hold portions of endowment assets. For related endowment investment strategies, see our guide on how CDs work as a low-risk vehicle. This income is typically tax-exempt for qualifying organizations.

Well-managed endowments help nonprofits weather funding fluctuations and reduce dependence on annual fundraising. However, many smaller nonprofits operate without significant endowments and rely primarily on annual giving and grants to fund their work.

Fundraising events — galas, auctions, fun runs, and benefit concerts — generate revenue while building donor relationships. Only the portion of event ticket revenue that exceeds the fair market value of goods or services received (meals, entertainment) may qualify as a charitable deduction for attendees. Nonprofits must disclose this split to donors in writing.

Merchandise sales related to the mission — branded items, educational materials, or goods produced by program participants — may generate modest revenue. Unrelated merchandise sales may trigger UBIT rules. Many nonprofits consult a tax professional before expanding into merchandise or for-profit activities.