The Issue

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

• IRS Publication 598: Tax on Unrelated Business Income of Tax Exempt Organizations
  

Reporting Unrelated Income for UBIT
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.

UBIT Exceptions
The Internal Revenue Code contains 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 excluded when computing unrelated business income. 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 with respect to the operations of organizations that are tax-exempt under section 501(c)(7), 501(c)(9), 501(c)(17), or 501(c)(20). Learn more.

• IRS Stay Exempt - UBIT Module
  
• UBIT tax return information