As nonprofit organizations explore new ways to fund their missions, they may consider income-generating activities that fall outside their core purpose. These activities can generate unrelated business income (UBI) and may be subject to UBI tax, even for tax-exempt organizations. Understanding UBI is essential for nonprofit leaders looking to grow their revenue responsibly.

What are UBI, UBIT, and UBTI?

  • Unrelated business income (UBI) is income from a trade or business activity that is regularly carried on and not substantially related to the nonprofit’s exempt purpose. UBI is generally taxable. 
    • Example: A charity that runs a coffee shop open to the public might earn UBI from that activity if it is not connected to the charity’s mission. Running a store is not necessarily an unrelated business activity, but selling items that are not mission-related may be. 
    • Identifying UBI: There are several exclusions and exceptions in the UBI rules. For example, income from selling donated items or running a store with volunteer labor could be excluded from UBI computations. Read more on the IRS website, and consult with your accountant or tax advisor regarding your nonprofit’s specific circumstances.
  • Unrelated business income tax (UBIT) is the tax imposed on UBI. 
    • Why it exists: UBIT was established in the 1950s to prevent nonprofits from gaining an unfair competitive advantage over for-profit businesses when they engage in commercial activities unrelated to their missions. 
    • UBI tax rate: Most nonprofits organized as corporations will pay a flat 21% tax on their UBI. For trusts, the rate ranges from 10% to 37% (see the Form 990-W instructions for details on the computation). 
  • Unrelated business taxable income (UBTI) is essentially the same as UBI, but the term UBTI is most often used in the context of tax-exempt investments.  
    • Example: When tax-exempt entities such as IRAs invest in certain types of income-producing ventures like partnerships or private equity, UBTI is the portion of income from those investments that is subject to UBIT. 

 

What is program revenue? Is it subject to UBIT? 

  • Unlike UBI, program revenue is income from activities that directly support a nonprofit’s exempt purpose. Examples include fees for educational programs, health services, and other mission-related activities.  
  • Program revenue is generally not subject to UBIT. 

 

When and how would a nonprofit report UBI? 

  • If a nonprofit receives $1,000 or more in gross UBI in a year, it must file IRS Form 990-T and pay tax on the net profits from those activities.  
  • If the organization expects to owe $500 or more in tax, it must make quarterly estimated tax payments.  
  • Reporting UBI accurately is essential; failing to do so can result in penalties. 

 

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Can too much UBI threaten a nonprofit’s tax-exempt status? 

  • If UBI becomes a substantial part of a nonprofit’s overall activities, it may threaten a nonprofit organization’s tax-exempt status.
  • Nonprofits should regularly review their income-generating activities to make sure they are not unintentionally generating UBI and consult with their accountant or tax advisor regarding strategies to minimize taxation. 

 

What is a qualified sponsorship payment? Are these payments subject to UBIT? 

  • A qualified sponsorship payment is a payment made from a business (or individual engaged in a trade or business) to a nonprofit without an arrangement or expectation of any substantial return benefit to the sponsoring business other than use or acknowledgement of their name, logo, or product line in connection with the nonprofit’s activities. 
  • Generally, as long as the sponsor does not receive a substantial return benefit, the payment isn’t contingent upon event attendance or other degree-of-publicity factors, and the payment isn’t related to convention and trade show activity, the payment will not be subject to UBIT. 

 

YPTC Can Help

Accounting for unrelated business activities can be complex. Watch our on-demand webinar, Uncovering UBI: What Every Nonprofit Leader Needs to Know, for more information. 

For a deeper understanding of the UBIT rules and their implications for your nonprofit’s circumstances, consult your tax advisor. 

YPTC can help you set up your nonprofit accounting system to properly track and distinguish between income transactions that could potentially create UBIT scenarios. We can also alert you to activities and transactions that may need further evaluation for UBI implications. 

Contact us today to get started!