Unrelated Business Income
In general, a nonprofit maintains its tax-exempt status when it conducts activities that support the tax-exempt purposes of the organization, such as an animal shelter providing care for its animals. If an activity is unrelated, any income earned might be considered unrelated business income, which is taxable. The test to determine whether income is UBI involves meeting a three-part test: First, it must be from a business or trade activity. Second, the activity must be carried on regularly. Third, the business must not substantially relate to the organization’s exempt purpose.
Whether a nonprofit organization can sell tickets to a concert depends on how the activity fits into the three-part test. A nonprofit chamber orchestra could sell concert tickets on a regular basis as part of its exempt purposes. A school support organization, such as a PTO, could sell concert tickets as long as it doesn't sell such tickets frequently or regularly. An annual fundraiser, for example, is not considered something that's carried on regularly.
Paying Taxes on UBI
A nonprofit organization can pay tax on UBI and not lose its tax-exempt status as long as the UBI is only a small part of the overall income of the organization. However, dealing with this can be messy, with increased filing requirements and the potential need to defend the organization's other activities fitting with its exempt purposes. It is generally preferable to keep all fundraising activities within the exempt purposes of the organization.
Individual State Requirements
Nonprofit organizations should check any requirements of the state or states in which they are going to conduct fundraising activities. Many states require registration with the state charity organization, for example, before seeking contributions from state residents. The website of the National Association of State Charity Officials has a list of all U.S. state charity offices.