Unrelated Business Income Tax (UBIT)

Charitable Giving

The Issue

While a nonprofit organization is tax-exempt, it may still be liable for tax on its earned unrelated business income.

For most organizations, unrelated business income is earned income from a trade or business, regularly carried on, not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.

An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if it expects its tax for the year to be $500 or more. The obligation to file Form 990-T is in addition to the obligation to file the annual information return, Form 990, 990-EZ or 990-PF.

Exceptions

The Internal Revenue Code recognizes a number of modifications, exclusions, and exceptions to unrelated business income. Dividends, interest, certain other investment income, royalties, certain rental income, certain income from research activities, and gains or losses from the disposition of property are generally excluded. In addition, the following activities are specifically excluded from the definition of unrelated trade or business:

  • Volunteer labor (ex. volunteer operated bake sales
  • Convenience of members (ex. school cafeterias, university gyms)
  • Selling donated merchandise (ex. many thrift shop operations of exempt organizations)
  • Bingo games

There are also certain exceptions for organizations that are tax-exempt under section 501(c)(7), 501(c)(9), 501(c)(17), or 501(c)(20). Learn more about these exceptions on the IRS website.

Learn more about unrelated business income through a IRS Stay Exempt course.

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