UBIT: What Nonprofits Need to Know

Sorting out whether a nonprofit has unrelated business income and whether they need to pay unrelated business income tax can be daunting. The general public often assumes that nonprofit organizations pay no taxes. In reality, tens of thousands of nonprofits report billions in taxable income and hundreds of millions in unrelated business income tax annually. While many nonprofit organizations don’t have unrelated business taxable income after subtracting deductions, it is important to do a thorough evaluation. An unexpected unrelated business income tax can be a major expense.

The Internal Revenue Code states that UBI is income generated by the activities of tax-exempt organizations that:

1. Are a trade or business carried on for the production of income from the sale of goods or performance of services,

2. Are regularly carried on (i.e. “if they manifest a frequency and continuity, and are pursued in a manner, generally similar to comparable commercial activities of nonexempt organizations.”, and

3. They are not substantially related to the organization’s exempt purpose (using the income from an unrelated business activity to support the nonprofit’s mission is not enough to overcome classification as UBI)

Nonprofit revenues generally fall into three categories:

1. Contributions (clearly not UBI)

2. Program service revenue – funds derived from the nonprofit charging fees from the furthering of its mission (i.e. admission fees to a museum or patient revenue to a hospital)

3. Unrelated revenue (everything else)

Perhaps the single most important advice when dealing with potential UBI issues is to take a reasonable position and document it. As with so many other tax position questions, contemporaneous documentation of your considerations and conclusions is one of the most important pieces of evidence when dealing with UBI issues.

Schreiber Accounting and Advisory has long experience working with nonprofit organizations on financial statement audits, reviews, and compilations; as well as Form 990 preparation and management advisory services. If your organization needs the assistance of a qualified CPA firm, contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.