UBIT (Unrelated Business Income Tax) is a tax imposed on the unrelated business income generated by tax-exempt organizations.
A nonprofit, tax-exempt organization is not taxed on income that comes from an activity that is substantially related to the charitable, educational, or other purpose that is the basis for the organization’s tax-exemption. Such income is exempt even if the activity is a trade or business.
However, if a nonprofit, tax-exempt organization regularly carries on a trade or business that is not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business.
How do I determine my nonprofit organization is subject to UBIT?
Unrelated Business Income consists of income generated by the nonprofit organization from activities that are not related to the exempt mission of the entity. Income from an activity is considered unrelated if all three of the conditions listed below are met:
(1) The activity is conducted as a trade or business
What is a trade or business?
An activity is considered to be conducted as a trade or business if its primary purpose is to generate a profit from the sale of goods or service.
(2) Regularly carried on
What does it mean to be regularly carried on?
UBIT applies only to activities that are regularly carried on, as opposed to activities that are sporadic or infrequent. An activity is considered regularly carried on if it is conducted with a frequency comparable to the conduct of a similar activity in the private sector.
(3) Not substantially related to the organization’s exempt purposes.
How is an activity characterized as not being substantially related to its exempt purpose?
What is the group’s exempt purpose? An school’s exempt purpose may be education and research. So an activity whose purpose is not substantially related to education or research would be characterized as unrelated. It is irrelevant that the proceeds from an activity will be used to fund education or research. The determining factor is the nature of the activity itself.
Examples of unrelated business income are (1) the operation of a miniature golf course in a commercial manner by a tax-exempt providing for the welfare of teenagers and (2) the presentation of commercial programs and the sale of air time by a tax-exempt broadcasting station.
Examples of related business income are (1) a furniture shop operated by an exempt halfway house and staffed by residents and (2) the sponsorship of championship tournaments by a tax-exempt organization organized to promote a sport.
The tax code has many exceptions and rules that are too extensive to include here. Determining whether or not the income from an activity is taxable can be difficult. Please contact our office and discuss your situation with us.
IRS Definition: Unrelated Business Income Defined
Learn More: Does A Nonprofit File Tax Returns?