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.” Because tax-exempt organizations generally operate for charitable or other beneficial purposes, most income that they receive is exempt from tax under the Internal Revenue Code. However, income-producing activities that are considered to be "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, know as "UBIT."

Practice Pointers

  • The IRS has stepped up its 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 UBI.
  • 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" so we recommend caution if your nonprofit is engaged in these activities. Also, 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 actually what triggers the tax. Read more about the tax treatment of income received from corporate sponsorships.
  • The 2017 Tax Cuts and Jobs Act created a new UBIT liability for tax-exempt organizations that provide transportation fringe benefits for their employees. The National Council of Nonprofits and others are calling on Congress to repeal of these provisions. See resources on UBIT posted on our resource page about the 2017 federal tax law.

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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