Unrelated Business Income Taxation

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When tax-exempt charitable nonprofits earn income through an activity that is unrelated to their exempt purposes (such as activity that is commercial in nature, like sales of goods) and the activity is “regularly carried on,” the revenue from the activity may be taxable income under IRS rules for “unrelated business income taxation,” often referred to as “UBIT.”

Tax-exempt organizations generally operate for charitable or other beneficial purposes and therefore most income that they receive is exempt from tax under the Internal Revenue Code. However, income-producing activities considered "unrelated to their exempt purposes" may result in taxable income.

How do you know whether income is taxable as unrelated business income?  Read about the tax on unrelated business income, known as "UBIT."


The 2017 federal tax law imposed new taxes on tax-exempt organizations by expanding UBIT, the second one was later repealed:

  • Tax on “Separate” “Trade or Business” (Silo-ing): The 2017 tax law requires nonprofits calculate their taxes on each “trade or business” separately and not aggregate profits and losses of all entities. The Nonprofit Relief Act of 2019 (H.R. 3323) failed but would have repealed this provision.
  • Tax on Nonprofit Transportation Benefits: The 2017 tax law imposes a 21% UBIT on the expenses nonprofits incur in providing their employees transportation benefits, such as transit passes and parking. This provision was later repealed thanks to strong nonprofit advocacy.

Practice Pointers

  • The IRS has increased review and enforcement of this tax liability area. Changes to reporting requirements were included in the 2017 tax bill, which will trigger new guidance from the IRS about how nonprofits document and report UBIT.
  • Remember that charitable nonprofits filing the IRS Form 990-T must make that form available for public inspection when requested. (See instructions to IRS Form 990-T).
  • The potential tax liability for unrelated business income requires every charitable nonprofit to know where its income is coming from and determine whether any of its income is taxable under the UBIT regulations.
  • Income from advertising and corporate sponsorships is prone to being considered “unrelated." We recommend caution if your nonprofit is engaged in these activities.
  • Just because the income is used for a mission-related purpose does not shield the income from tax liability. The activity that generated the income/loss is what triggers the tax. Read more about the tax treatment of income received from corporate sponsorships.

Note: Information on this website is not legal advice. We encourage nonprofits with questions in this area to seek guidance from professional advisors such as CPAs and legal counsel with experience advising tax-exempt organizations.


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