Unrelated Business Income is a topic that affects many not-for-profit organizations. Below are answers to some frequently asked questions relating to unrelated business income. For more information, please visit the Internal Revenue Service’s website at www.IRS.gov.
What is unrelated business income?
The income generated from an activity that meets three requirements: the activity is a trade or business,
the activity is regularly carried on (conducted in the same frequency and continuity as a for-profit organization would conduct a similar activity), and
the activity is not substantially related to furthering the exempt purpose of the organization.
Is having unrelated business income a bad thing?
Not at all. However, organizations should be careful when it comes to the amount of activities they are involved in that generate unrelated business income, because excessive activities could prompt the IRS to review (and possibly, reconsider) the organization’s tax-exempt status.Unrelated Business Income is a topic that affects many not-for-profit organizations. Below are answers to some frequently asked questions relating to unrelated business income. For more information, please visit the Internal Revenue Service’s website at www.IRS.gov.
What is unrelated business income?
The income generated from an activity that meets three requirements:
- the activity is a trade or business,
- the activity is regularly carried on (conducted in the same frequency and continuity as a for-profit organization would conduct a similar activity), and
- the activity is not substantially related to furthering the exempt purpose of the organization.
Is having unrelated business income a bad thing?
Not at all. However, organizations should be careful when it comes to the amount of activities they are involved in that generate unrelated business income, because excessive activities could prompt the IRS to review (and possibly, reconsider) the organization’s tax-exempt status. Is unrelated business income taxable, and if so, what IRS Form does my organization need to complete?
Income from activities that are unrelated to the organization’s primary mission may be taxable (see list of exceptions/exclusions below). A tax-exempt organization that has $1,000 or more of gross receipts from an unrelated business activity must file Form 990-T. Additionally, if an organization expects its tax for the year to be $500 or more, it must pay quarterly estimated tax on the unrelated business income (can use Form 990-W as a helpful worksheet).
What are the unrelated business income tax exceptions and exclusions, as per the IRS (i.e. what activities are excluded from the definition of unrelated trade or business)?
- Dividends, interest, certain other investment income, royalties, certain rental income, certain income from research activities, and gains/losses from the disposition of property are excluded from the computation of unrelated business income.
Volunteer labor - activities where substantially all of the work is done by volunteers.
Convenience of members - For 501(c)(3) organizations, as well as governmental colleges or universities, activities that are carried on for the convenience of members, students, patients, officers or employees are excluded from UBIT. Examples include a hospital gift shop or school cafeteria.
Selling Donated Merchandise - the sale of merchandise that has been donated to the organization. A typical example of this would be a thrift shop.
Bingo - the IRS does not consider certain bingo games to be unrelated trade or business.
