Even though your organization is tax exempt, you may still be liable for taxes on certain income, referred to as unrelated business income (UBI).
What is considered unrelated business income?
For most organizations, an activity is an unrelated business if it meets three requirements:
- It is a trade or business - meaning the activity is carried on for the production of income from selling goods or services.
- It is regularly carried on - these are activities that show a frequency and continuity
- It is not substantially related to furthering the exempt purpose of the organization - activities that generate the income and do not contribute importantly to accomplishing the organization's exempt purposes to be substantially related
There are several modifications, exceptions, and exclusions to the general definition of UBIT, including business activities involving volunteer labor, donated merchandise and others.
What does my organization need to do if we make an income from unrelated business?
An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T in addition to your Form 990, 990-EZ or 990-PF. An organization must pay estimated tax if it expects its tax for the year to be $500 or more.
What are some examples of unrelated business income?
- Case #1 - An arts organization owns a building and a parking lot. The parking lot is primarily used in the evenings and weekends for the organization's events. The organization recognizes the opportunity to earn revenue by opening the parking lot up to individuals for paid parking during the weekdays. Although the income from the parking lot helps fund the organization's various programs, it is not directly related to the mission and purpose. The income generated from the parking lot IS considered unrelated business income and subject to unrelated business income tax (UBIT).
- Case #2 - A history museum charges an entrance fee for visitors. The museum is open year-round for visitors to learn about the history of the town and county. Even though the activity is regularly carried out, the business activity is directly related to the purpose of the organization, therefore, the income is NOT considered UBI and is not taxable.
- Case #3 - An animal welfare organization dedicated to educating the public on proper pet ownership and care, among other purposes, has a shop in its animal shelter. The shop sells leashes and collars, food and water bowls, and animal training videos. Because the business activity of buying the animal related items is directly related to the organization's mission, the income generated is NOT UBI.
Please note that these are examples, and various details and activities may change the classification of income generated. If you have any concerns about your organization's business activities as UBI, please consult legal counsel.
IRS Publication 598 - Find specific information about UBIT. You'll also find several examples.
Pro Bono Legal Group (PBLG) - If you have uncertain of your business activities and earned revenue, smaller organizations may submit a pro bono legal request to our PBLG. Your request will be sent to a group of volunteer lawyers who may volunteer to assist your organization. Please note that there is no guarantee of placement with an attorney.
Hurwit & Associates - Find additional information, including exclusions.