Unrelated Business Income Tax
Topics on this page
- What is Unrelated Business Income Tax (UBIT)?
- What Organizations are Subject to UBIT?
- How much is the Tax and what are the Reporting Requirements?
- What are the Exclusions to UBIT?
- What is Not Excluded from UBIT?
- Who Must Publicly Disclose UBIT?
- What are the Consequences of not Paying the Tax or Reporting the Income?
What is Unrelated Business Income Tax (UBIT)?
Unrelated business income tax is a tax on all income earned from an unrelated business activity, minus tax deductions as a result of producing that income. An activity is unrelated business if it meets all 3 requirements:
- It is a trade or business. This includes any activity carried on to produce income from selling goods or performing services. For example, an art museum exhibits modern art and operates a gift shop that sells educational books on the development of art and t-shirts featuring the museum’s logo. The museum is selling these goods for a profit and is therefore in a trade or business.
- It is regularly carried on. The activity is performed frequently and continuously and is operated in a manner similar to comparable commercial activities of nonexempt organizations. For example, if the museum operates the gift shop every weekend, year-round, this activity is regularly carried on. If the gift shop is only in operation for the first week that the museum is open, then this activity is not regularly carried on.
- It is not substantially related to furthering the exempt purpose of the organization. The activity does not contribute importantly to accomplishing the organization’s tax-exempt purposes. For example, the sale of educational books on the development of art contributes importantly to the museum’s exempt educational purpose by enhancing the public’s understanding of art. However, t-shirt sales have no relationship to art and do not contribute importantly to accomplishing the museum’s exempt educational purposes.
Read the law: U.S. Code, Title 26 § 512
What Organizations are Subject to UBIT?
The tax on unrelated business income applies to organizations that are exempt from tax under section 501(a) of the Internal Revenue Code including charitable, religious, and scientific organizations described in 501(c) and employees' trusts forming part of pension, profit-sharing, and stock bonus plans described in 401(a). This does not include 501(c)(1) organizations. The tax also applies to individual retirement arrangements, state and municipal colleges and universities, qualified state tuition programs, medical savings accounts, and Coverdell savings accounts.
Read the law: U.S. Code, Title 26, § 511
How much is the Tax and what are the Reporting Requirements?
All organizations with unrelated business taxable income are subject to taxes at corporate rates on that income. For each taxable year, the corporate tax rate imposed will be a flat rate of 21 percent of that organization’s taxable income. There are exceptions, including exempt trusts, certain insurance companies, etc. All exempt trusts subject to the tax on unrelated business income are taxable at trust rates on that income.
Forms and filing instructions for tax exempt organizations subject to unrelated business income taxes are available on the Internal Revenue Service (IRS) website. A tax year is an accounting period, typically 12 months, for keeping records and reporting income and expenses. There are two different tax years: the calendar year and the fiscal year.
- The calendar year is 12 consecutive months beginning January 1 and ending December 31.
- The fiscal year is 12 consecutive months ending on the last day of any month except December. If a tax-exempt organization is required to file Form 990-T and is operating under a fiscal tax year beginning December 1 and ending November 30, the museum must file the form by April 15 of the following year.
In addition, a tax-exempt organization must make estimated tax payments if it expects its tax for the year to be $500 or more. These payments are generally due the 15th day of the 4th, 6th, 9th, and 12th months of the tax year and must total 100% of the organization’s total tax liability for that year. Forms and filing instructions for estimated tax payments is available on the IRS website.
Read the law: U.S. Code, Title 26, § 11
What are the Exclusions to UBIT?
Types of Income - Generally, unrelated business income is taxable. However, the following income sources are excluded from taxes:
- Certain other investment income
- Certain rental income
- Certain income from research activities
- Gains or losses from the disposition of property
Read the law: U.S. Code, Title 26, § 512(b)
Trade or Business Activities - In addition to exclusions for certain types of income, the following activities are excluded from the definition of an unrelated trade or business:
- Volunteer labor
- Activities for convenience of members
- Selling donated merchandise
Read the law: U.S. Code, Title 26, § 513
What is Not Excluded from UBIT?
If a controlling organization receives specified payments of interest, annuities, royalties, or rent from another organization that it controls (“controlled organization”), those payments are not excluded from unrelated business income tax. The tax still applies whether or not the activity conducted by the controlling organization to earn the income is a trade or business or is regularly carried on. An entity is a controlled organization if the controlling organization owns:
- In the case of a corporation, the controlling organization owns by vote or value more than 50%of a corporation’s stock;
- In the case of a partnership, the controlling organization owns more than 50% of a partnership’s profits or capital interests; or
- In the case of any other organization, the controlling organization owns more than 50% of the beneficial interest in an organization.
Specified payment means any payment of interest, annuities, royalties, or rents. The payment is included in gross income to the extent that the payment reduces the net unrelated income of the controlled organization. However, if a controlling organization receives any payment of interest, annuities, royalties or rents from a controlled organization after August 17, 2006 and before December 31, 2014 , based on a binding written contract, then the payment may be excluded from unrelated business income.
Read the law: U.S. Code, Title 26, § 512(b)(13)
Who Must Publicly Disclose UBIT?
A 501(c)(3) organization must make Form 990-T available to the public. This includes through Internet postings and in-person or written requests. The form must be made available for a 3-year period beginning on the due date of the return. Any schedules, attachments, or supporting documents that relate to the imposition of tax on the organization’s unrelated business income must also be made available for public inspection. More information is available on the IRS website.
Read the law: U.S. Code, Title 26, § 6104
What are the Consequences of not Paying the Tax or Reporting the Income?
An exempt organization may be subject to interest and penalty charges if it fails to pay a tax when the tax is due, underpays its tax liability, does not file a return, or if it files a late return. Interest is charged on taxes not paid by the due date and on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, and substantial understatements of tax from the due date to the date of payment. Use of a paid tax preparer does not relieve the organization of its responsibility to file a complete and accurate return. Information about interest and penalties is available on the IRS website.