Reporting Unrelated Business Income (UBI)

Per the IRS: "Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function." It is difficult at times to determine if what an AVO is doing to raise money is a trade or business. The common sense interpretation is that if it takes business away from a profit-making tax-paying business, it is a trade of business. However, even if it is, to be UBI it must be conducted regularly; it would be OK if it is just conducted one time or very rarely. Also, to be UBI, it must be related to the purpose of the AVO only in that it provides profits to be used by the AVO; if it related to the purpose (for example, food stand at athletic events) then again it is OK and not UBI. This can get tricky and once again, we recommend if there is any doubt whether an activity of an AVO represents UBI, a CPA should be consulted.

An AVO needs to file a tax return (990-T, due the 15th of the fifth month after the end of the AVO's tax year) and pay tax on Unrelated Business Taxable Income (UBTI) only if it has gross income (Revenue from UBI activities minus Cost of Goods Sold, if any, but not reduced by other expenses) in a year in excess of $1,000. Many AVOs are small enough to never exceed this threshold and do not have to file. However, one thing to note is that an AVO regularly conducts gaming activities to support its purpose but not related to its purpose, it is the gross money collected, not the net profit that is used to determine if the $1,000 gross income has been exceeded and, of course, this may impact some AVOs. However, the AVO does get to deduct expenses in arriving at taxable income. So, an AVO may taxable income of less than $1,000 and pay tax on it (Tax is assessed from the first dollar of taxable income.) because it had to file due to exceeding the $1,000 gross income limit. The tax on UBTI small AVOs is 15%.

Note: Having UBI does not in and of itself jeopardize an AVO's tax-exempt status. The only consequence is that the AVO may have to pay tax on the UBTI.

Links to resources available for download from our site and to resources available at the IRS related to UBI and form 990-T are provided below:

IRS Overview of Unrelated Business Income Tax

IRS Publication 598: Tax on Unrelated Business Income of Exempt Organizations

IRS form 990-T: Exempt Organization Business Income Tax Return

Instructions for IRS form 990-T: Exempt Organization Business Income Tax Return

Next: Maintaining Tax-Exempt Status

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