Ann Emery, CPA explains what nonprofits need to watch out for with unrelated business income tax.
Nonprofit organizations facing increased competition for donor dollars may start to seek out income diversification, meaning they are considering alternative revenue streams outside their exempt purpose. While this may raise additional funds, it could possibly subject tax-exempt entities to unrelated business income tax (UBIT).
Congress added the UBIT provisions to the Internal Revenue Code to make sure nonprofit organizations conducting similar activities as for-profit organizations didn’t have an unfair advantage. Revenue of nonprofit organizations would no longer qualify for exemption just because its profits were used for charitable purposes.
What is UBIT?
UBIT is the tax paid on unrelated business income. An organization will generate unrelated business income if:
- It is a trade or business
- It is regularly carried on
- It is not substantially related to furthering the exempt purpose of the organization
A trade or business includes the sale of goods or services with a profit motive. An activity is regularly carried on if it occurs with a frequency and continuity similar to what a commercial entity would do if it performed the same activity. An activity is not substantially related if the activity doesn’t contribute to accomplishing the organization’s purpose.
Once an organization has gone through these tests and determined if their activity is unrelated business income, they should be aware that the IRS has allowed certain activities to be excluded from the unrelated business income rules.
If the gross income from the unrelated business activity is $1,000 or more, the organization must file Form 990-T Exempt Organization Business Income Tax Return.
An organization will be informed and prepared from the start if they understand the basics of unrelated business income and are proactive in the planning stages of an activity and related tax consequences.
Questions about UBIT? Contact Ann for answers!