Non-profit organizations that have gross income of $1,000 or more from an unrelated trade or business are required to file Form 990-T with the IRS. But what is considered unrelated business income (UBI)? According to the IRS, for most organizations, an activity is an unrelated business, and therefore subject to unrelated business income tax (UBIT), if it meets the following three requirements.
- It is a trade or business;
- It is regularly carried on; and
- It is not substantially related to furthering the exempt purpose of the organization.
An example of possible UBI is a non-profit organization that regularly holds weddings or other events not related to the organization’s exempt purpose on their facilities. Another is a non-profit university that regularly charges the public for usage of a parking garage for unrelated activities. Note that there are a number of exclusions and exceptions to the general definition of UBI. Determining whether a certain activity is UBI is not usually black and white and requires some judgment and analysis. Annually, management should consider their current year operations to determine if there could possibly be any UBI. Management should seek help from their tax preparer for guidance. All management decisions should be supported and documented in writing. For more information and detail on UBI and examples and exceptions, please click on the following link to the IRS Publication 598.
Shannon Crowley is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Shannon oversees audit engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects. Shannon has worked with clients in a variety of industries, including healthcare, higher education, non-profit, manufacturing and distribution.