A common misconception about a nonprofit organization is that it cannot make more money than it spends. In reality, a nonprofit can generate more revenue than its expenses during a particular year. The difference is generally referred to as a surplus, rather than profit.

Having a surplus does not automatically change a nonprofit's status or mean that the organization is operating for private financial gain. Instead, the organization can generally use the surplus to strengthen its finances, support future programs, and further its mission.

What Is a Nonprofit Surplus?

When a nonprofit organization's total revenue is greater than its total expenses for a financial period, the organization has a surplus.

For example, suppose a nonprofit receives:

• $500,000 in donations and grants
• $100,000 from programs and other activities
• $50,000 from membership fees

Its total revenue would be $650,000. If the organization spends $550,000 on programs, salaries, administration, fundraising, and other operating expenses, it would have a $100,000 surplus.

This does not mean the nonprofit has earned money for its owners. Instead, the remaining funds generally stay within the organization and can be used to support its mission.

Can a Nonprofit Keep the Extra Money?

Yes. A nonprofit organization can generally retain a surplus rather than spending all of its revenue during the same year.

Keeping some funds can be an important part of responsible financial planning. Nonprofits may experience changes in donations, grants, operating costs, or economic conditions. Having reserves can help an organization continue its programs when revenue temporarily decreases.

For example, a nonprofit may use part of its surplus to create an operating reserve that can help cover future expenses.

How Can a Nonprofit Use Its Surplus?

A nonprofit organization can use surplus funds in several ways, depending on its mission, financial policies, donor restrictions, and applicable requirements.

1. Expand Programs

A nonprofit may invest additional funds into existing programs or launch new initiatives. For example, an organization focused on education might use surplus funds to provide additional scholarships or purchase learning resources.

2. Build Financial Reserves

Maintaining reserves can help protect a nonprofit from unexpected expenses or temporary funding shortages. A strong reserve can also provide greater financial stability.

3. Invest in Employees

Surplus funds may allow an organization to hire additional employees, provide training, improve benefits, or strengthen its internal operations.

4. Purchase Equipment or Property

A nonprofit may use available funds to purchase computers, vehicles, equipment, or property needed to carry out its mission.

5. Improve Infrastructure

Organizations may invest in technology, accounting systems, websites, cybersecurity, or other infrastructure that improves efficiency and long-term operations.

Can a Nonprofit Pay Its Employees More?

Yes. A nonprofit organization can pay employees for their work, including competitive salaries and benefits. The fact that an organization has a surplus does not prevent it from paying reasonable compensation.

However, nonprofit compensation should be handled carefully and in accordance with applicable rules and governance procedures. A surplus should not simply be distributed to individuals because the organization has extra money.

The organization should maintain appropriate documentation and follow its compensation policies.

Can the Owners Take the Surplus?

Generally, nonprofit organizations do not have owners who can take the organization's surplus as personal profit in the same way shareholders can receive distributions from a for-profit corporation.

The organization's funds are intended to support its mission. Board members, employees, and other individuals may receive legitimate compensation or reimbursement for services and expenses, but the organization's surplus is not simply divided among them as an ownership return.

What About Donor-Restricted Funds?

Not all nonprofit revenue is necessarily available for any purpose. Donors may provide contributions with specific restrictions.

For example, a donor might give $50,000 specifically to fund scholarships. Even if the nonprofit has an overall surplus, it should account for restricted funds appropriately and use them according to the applicable restrictions.

This is one reason accurate nonprofit accounting is important. Organizations need to understand where their money came from and how it can legally and appropriately be used.

Does a Surplus Affect Tax-Exempt Status?

Having a surplus does not automatically mean that a nonprofit organization loses its tax-exempt status. A nonprofit can generally have a positive financial result while continuing to operate for its exempt purpose.

However, tax treatment depends on the organization's structure, activities, and applicable federal and state requirements. Certain activities or types of income may create separate tax or reporting obligations.

Nonprofits should also maintain appropriate records and complete required filings, such as applicable annual information returns.

Why Is Nonprofit Accounting Important?

Accurate accounting helps a nonprofit organization understand whether it is operating at a surplus or deficit and how its resources are being used.

Good financial records can help nonprofits:

• Track donations, grants, and other revenue
• Monitor operating expenses
• Manage restricted and unrestricted funds
• Prepare financial statements
• Create realistic budgets
• Plan for future expenses
• Meet tax and reporting requirements
• Demonstrate financial accountability to stakeholders

Professional accounting support can be particularly useful as a nonprofit grows or receives funding from multiple sources.

Final Thoughts

When a nonprofit organization makes more money than it spends, the difference is generally a surplus. The organization can typically retain those funds and use them to strengthen its financial position, expand programs, build reserves, invest in employees, or support future activities.

The important point is that a nonprofit's surplus is not the same as an owner's profit. The funds should remain aligned with the organization's mission and applicable requirements. Proper accounting, financial planning, and compliance practices can help a nonprofit make responsible decisions about its surplus and maintain long-term financial stability.