Nonprofit Taxable Activities, Production Complementarities, and Joint Cost Allocations

Abstract – Nonprofit organizations earn both tax-exempt and taxable revenues. The taxable portion of nonprofit revenues is nonprofits smallest, yet most quickly growing revenue source. Because nonprofits may have a natural aversion to ancillary activities, taxable ventures need to provide higher returns than alternative investments. This paper examines how nonprofits’ ability to exploit production complementarities increases the available returns to taxable activities thus providing incentives to earn additional taxable revenues given the decision to engage in taxable ventures. The paper tests the theory that complementarities encourage taxable activities because they increase pre-tax returns owing to lower production costs and after-tax returns by making it easier to allocate joint costs from tax-exempt to taxable activities. Results find support for both hypotheses. Additional results find that industry grouping, and age can be used as reasonable proxies for a nonprofit’s ability to exploit production complementarities. ______________________________________________________________________________