The Nonprofit FAQ

How is Unrelated Business Income Tax (UBIT) Calculated?

Stefan Toepler asked in Cyber Accountability (a service of CharityChannel.com) on 3/17/98: I just found myself wondering whether the UBIT rate equals the regular corporate tax rate or is higher (or lower). If these rates are essentially the same, why did the law introduce UBIT as opposed to just imposing corporate income tax on unrelated activities. Admittedly not having researched the UBIT issue in all its depth, I can't recall any references to this particular issue. Does anyone have a quick answer? Many thanks in advance! Stefan Toepler, Ph.D. Center for Civil Society Studies The Johns Hopkins University Institute for Policy Studies Chip M. Watkins, of the Washington, DC, lawfirm Webster, Chamberlain & Bean (http://www.wc-b.com/), responded: The UBIT is imposed at the same rates as are imposed on corporations (or trusts, as the case may be). In essence, the law does exactly what you suggest, imposing the corporate income tax on unrelated activities. No dispute there. The nasty issues, of course, are what activities are unrelated, and the extent to which the exempt organization (EO) may allocate indirect expenses against the unrelated business income. EOs have never litigated the rate of tax--all of the UBIT litigation goes to one or both of these two issues. Scott Taylor of the University of Alaska Foundation, wrote to CHARITYLAW (a service of CharityChannel.com) on October 4, 1999: Check out our special event form at http://www.alaska.edu/foundation/downloads/specialEventTaxForm.pdf. The questions are designed to help you decide if you have a UBIT issue. The criteria are at the end of the form. (Note: This URL opens a "portable document format" file. You must have the Adobe .pdf file-reader installed on your computer to read such files. The reader is available without charge from several online locations, including http://www.adobe.com/products/acrobat/readstep.html) For a more general discussion of UBIT and related requirements, see http://www.idealist.org/if/i/en/faq/900-3/72-49 &mdash Ed. Posted 6/19/98; updated 10/4/99; UA Foundation link repaired, 5/17/07 -- PB