Cost Allocation and Taxation at Nonprofit Organizations Nonprofit organizations are exemptfrom federal income tax except for income from any activities that are unrelated to the nonprofit’scharitable purpose. An example is the use of a laboratory for both tax-exempt basic medical researchand for testing a taxable product for commercial pharmaceutical firms. A concern in these cases is thattax-exempt nonprofit organizations will be able to compete unfairly with for-profit firms because oftheir tax-exempt status. The key argument is that common costs for the nonprofit’s exempt and businessactivities will be used to “subsidize” the for-profit business (in this case, the taxable product testing).Required How would cost allocation play a role in affecting the operating results of a nonprofit organization that has both business and charitable activities?
Cost Allocation and
from federal income tax except for income from any activities that are unrelated to the nonprofit’s
charitable purpose. An example is the use of a laboratory for both tax-exempt basic medical research
and for testing a taxable product for commercial pharmaceutical firms. A concern in these cases is that
tax-exempt nonprofit organizations will be able to compete unfairly with for-profit firms because of
their tax-exempt status. The key argument is that common costs for the nonprofit’s exempt and business
activities will be used to “subsidize” the for-profit business (in this case, the taxable product testing).
Required How would cost allocation play a role in affecting the operating results of a nonprofit organization that has both business and charitable activities?
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