The tax on unrelated business applies to most nonprofit organizations exempt from tax under section 501(a) including charitable, religious, scientific and other organizations described in section 501(c); employees’ trusts forming part of pension, profit-sharing and stock bonus plans described in section 401(a); individual retirement arrangements; state and municipal colleges and universities; qualified state tuition programs; medical savings accounts; and Coverdell savings accounts. Do you know if your nonprofit organization has unrelated business income subject to the tax?
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, except that the organization uses the profits derived from this activity. This definition can be further broken down into the following attributes:
- Trade or business generally includes any activities that are conducted for the production of income from selling goods or performing services.
- Regularly conducted activities are those that show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.
- Not substantially related activities are those which do not contribute importantly to accomplishing the organization’s exempt purpose other than through the production of funding.
Several common activities of nonprofit organizations are specifically excluded from the definition of unrelated business income; they include:
- Activities performed by a substantially volunteer workforce;
- Qualified sponsorship activities;
- Selling donated merchandise;
- Bingo games;
- Public entertainment activities traditionally conducted at a fair or exposition promoting agriculture or education; and
- Convention and trade show activities in conjunction with an international, national, state, regional or local convention, annual meeting or show that stimulate interest or demand in the industry.
Other activities must be evaluated on a case-by-case, item-by-item basis to determine if they match the purpose and mission for which the exempt organization received its tax-exempt status. If the exempt organization determines that it generated income from unrelated business activities, it must file Form 990-T and pay the tax on that income.
Contact Flexible Accounting Services of the Triangle today and let our professionals assist you in determining if your organization is required to pay an unrelated business income tax (UBIT). Don’t risk the loss of your tax-exempt status by failing to pay this tax.