How to navigate tax pitfalls of mixing charity with business

You may have noticed a certain trend that not for profit (NFP) organisations such as NGOs, charities, and religious organisations are adopting in a bid to move from reliance on donor funding to self sustainability.

Many of these NFPs are venturing into the world of business in order to supplement their incomes with profits from these activities.

Funding is a critical issue for this sector that has traditionally relied heavily on the good will of donors and well-wishers.

The economic crises affecting most donor rich countries has contributed to the decrease of donations. Further, there is a push from donors for good governance, transparency, and accountability.

To meet a funding deficit, most of the organisations are forced to explore new avenues of generating funds to support their activities.

This has transformed the NFPs into what I refer to as “hybrid” organisations.

Whereas this business model may meet the sustainability objectives, it also exposes the organisations to a myriad of complexities, including distortion of their tax status.

An organisation that may have previously qualified for income tax exempt status may lose this. Further, it becomes difficult to support a charitable status while engaging in profit generating activities.

Navigate murky waters

This article offers insight into how these “hybrid” organisations can navigate the murky waters of Kenyan tax compliance and efficiency.

An NFP organisation that desires to expand its operations into profit generating activity must seek professional tax advice.

This will ensure that you protect your income tax exempt status by exploring the various structuring models that protect your income from undue taxation or cause you to lose your tax exempt status.

For example, should the business activities be carried out by the NFP organisation itself or should a separate entity be set up for this? Each option has significant tax implications that must be considered before a decision is made.

If tax matters are not carefully considered, these hybrid NFPs risk losing 30 per cent or even more of their funds to the tax man.

Ndiritu is the PwC Kenya Tax Manager. elizabeth.ndiritu@ke.pwc.com