Is Your Nonprofit Subject to Tax?
Understanding Unrelated Business Income (UBI) and its implications is essential for nonprofits to maintain their tax-exempt status and avoid unnecessary penalties. Read on for information, insight, and tips on what nonprofits should know about Unrelated Business Income.
What is Unrelated Business Income (UBI)?
Unrelated Business Income (UBI) is income generated from activities that are not substantially related to an organization’s tax-exempt purpose. For income to be considered UBI, it must meet three criteria:
- Income from the Sale of Goods or Services
UBI arises from commercial activities where the organization provides goods or services in a business-like manner. This income is distinct from donations or revenue generated by program activities. - Regularly Carried On
The activity must be conducted with frequency and continuity similar to comparable commercial activities. This doesn’t mean it happens year-round, but it should be a regular and significant part of the organization’s calendar.
Not Substantially Related to the Organization’s Exempt Purposes
The activity generating the income must not be significantly related to the organization’s mission or exempt purposes. Even if the income from said activity might benefit the nonprofit’s mission, if the source of the income is not related to the mission, the income can be considered UBI.
If your organization generates more than $1,000 in unrelated business income, you are required to file Form 990-T. Filing Form 990-T is crucial for maintaining compliance. Failing to file can result in financial penalties and may jeopardize your organization’s tax-exempt status.
Examples of Activities That Might Be Subject to UBI
Some general examples of activities that may be considered Unrelated Business Income include:
- Renting Out Facilities
An exempt organization that rents out its function room to individuals for private events may be subject to UBI, as this activity is not substantially related to its exempt purpose. - Operating a Commercial Business
A church that operates a coffee shop open to the public on a regular basis may be subject to UBI since this commercial activity does not further the church’s religious mission. - Commercial Services
An animal welfare organization that offers boarding and grooming services to the public may be subject to UBI, as these services are not directly related to its mission of preventing animal cruelty.
Exceptions to UBI That Nonprofits Should Know
Of course, as with most tax standards, there are exceptions to UBI that nonprofits should know, such as:
- Rental Income
Income from renting out property is not considered UBI if the rental activity is related to the organization’s exempt purposes, assuming certain special provisions do not apply. - Games of Chance or Gambling Income
Income from legally conducted gaming activities is generally tax-free if the organization’s purpose is social or recreational. - Other Exceptions
Additional exceptions can be found in the IRS Publication 598.
Tips for Nonprofits To Know To Maintain Compliance
Navigating the complexities of UBI requires careful attention and proactive measures. One of the best tips for nonprofits is to document your position by detailing your reasons if you believe an activity is not subject to UBI, as this will support your stance in case of an audit. Proper documentation is essential for demonstrating compliance and maintaining transparency with regulatory authorities.
Additionally, if you are uncertain whether an activity is subject to UBI, consult tax advisors to ensure compliance. Seeking professional advice can help prevent potential issues and ensure your organization adheres to all relevant tax regulations.
Contact Leone, McDonnell & Roberts Today for More Information
Have questions about UBI and other tax-related considerations? Leone, McDonnell & Roberts can help provide the clarity and insight you need to make the right decision for your nonprofit organization. Schedule a consultation today with one of our experienced advisors.
