The Nonprofit FAQ

What is Unrelated Business Income? How is it reported? Taxed?

IRS Publication 598 discusses UBI and UBIT in detail. It is available online from http://www.irs.gov/pub/irs-pdf/p598.pdf Since August of 2006, every filing exempt organization has been required to provide a copy on request of its completed Form 990-T under the same rules that apply to the Form 990 and Form 990-EZ (there is more about this requirement at http://www.idealist.org/en/faq/103-107/62-42). Unrelated Business Income (UBI) of less than $1,000 is reported on Form 990 but does not require the preparation of Form 990-T or the payment of tax (UBIT). Earning UBI does not in itself call into question an organization's tax-exempt status. The IRS may, however, question an organization where UBI makes up a very large proportion of its total revenues. An activity must be a trade or business and regularly carried on to be considered a source of UBI. Income received from performing an exempt function (tuition, admissions for theatrical productions, hospital fees, and the like) is not UBI. Income from a trade or business that is is regularly carried on and used solely to support the organization's exempt functions is UBI; the use of the income is not a factor in identifying UBI. There are several circumstances under which income that seems unrelated to an organization's exempt purposes may not be classified as UBI. These are more fully discussed in Publication 598. If all or substantially all of the work involved is done by volunteers, the resulting income may not be UBI. If the income comes from something that is done primarily for the convenience of the organization's members, patients, employees, etc., it may not be UBI. If a payment that supports the organization's work ("sponsorship") is accompanied by certain kinds of recognition of the support, it may not be UBI. Selling donated merchandise, operating bingo games, and the distribution of premiums in connection with fundraising activities do not usually result in income classified as UBI Complicated accounting questions are found when an organization uses common facilities and has employees that are engaged in both exempt and unrelated activities. Allocating these expenses properly can be difficult; errors can expose the organization to additional taxes, penalties, and unfavorable publicity. Prepared May 17, 2007 -- PB