Unrelated Business Income Tax
Filing Requirements
If a non profit organization has unrelated
business income of $1,000 or more it is required to file IRS form 990 T. This form
is in addition to the requirement to file other returns such as IRS form
990 EZ, IRS form 990, or IRS form 990 PF. The filing of IRS form 990 T also applies to
non profit organizations that may not be required to file IRS form 990. Examples: A
church or a school.
Unrelated Business Income Tax (UBIT)
Tax is levied on unrelated business income
(UBI) because the non profit organization is engaging in substantial commercial
activities. Without a tax, nonexempt organizations would be placed at a
significant disadvantage when trying to compete with non profit organizations.
Therefore, unrelated business income tax is intended to neutralize the tax
differences. The unrelated trade or business could result in the loss of
non profit status if the activity is determined to be the primary purpose of
the non profit organization.
The objective of the tax on unrelated
business income is to tax such income as if the non profit organization were subject to
corporate income tax.
Unrelated Business Income - Three factors
must be present:
1) Non profit organization conducts a trade or
business,
2) Trade or business is not substantially related to the non profit
purpose
of the organization, and
3) Trade or business is regularly carried on by the non profit organization.
Factor #1) Trade or Business:
Includes any activity conducted for
the production of income through the sale of merchandise or the performance of services. Activity does not need to produce a profit.
Income from an unrelated trade or business used exclusively for carrying
on the non profit organization’s purpose is still considered unrelated
business income.
Factor #2) Not Substantially Related to the
Non Profit Purpose:
Not only must the trade or business contribute to the accomplishment of
the tax-exempt purpose, but there must be a substantial causal
relationship between the activity and the achievement of the non profit organization’s
exempt purpose.
Factor #3) Regularly Carried On:
Specific business activities of a non
profit organization will be deemed to be regularly carried on if they are
pursued in a manner similar to competing nonexempt organizations.
Factors determining if an activity is
"regularly carried on":
• Frequency of the activity.
• Continuity of the activity.
• Manner in which the activity is carried on—is it similar to the
activity undertaken by a taxable organization?
Exceptions to unrelated trade or
business classification:
• Volunteers are performing substantially
all the work of the trade or business.
• Trade or business consists of merchandise sales, and substantially all
of the merchandise has been received as gifts or contributions.
• For IRC §501(c)(3) organizations and state colleges or universities,
the trade or business is conducted primarily for the convenience of the
non profit organization’s members, students, patients, officers, or employees.
Qualified State Tuition Programs
Qualified state-sponsored tuition programs
are maintained by a state or state agency in which a person can (1)
purchase tuition credits or certificates that waive the tuition expense
for a designated beneficiary; or (2) make cash contributions to an account
set up solely for meeting higher educational expenses. These programs are
generally exempt from federal tax, but tax on unrelated business income
still applies. [IRC §529]
Controlled Subsidiaries And UBIT
TRA ’97 modified IRC §512(b)(13) making
it more difficult for non profit organizations to receive rent, royalty,
annuity, or interest payments from controlled subsidiaries and not be
subject to UBIT. The control percentage is reduced from 80% to more than
50%. If the parent non profit organization either directly or indirectly
controls more than 50% of the subsidiary, the income is subject to UBIT.
[IRC §318]
Agricultural And Horticultural Dues
Agricultural and horticultural non profit organizations that require members to pay annual dues of $109 or less are
not required to include the dues revenue as unrelated business income.
[IRC §512(d)]
Special Rule For Bingo
A qualified bingo game is not considered an
unrelated trade or business if three requirements are satisfied:
1) Bingo game is legal under both state and
local law,
2) Commercial bingo games (conducted for profit) ordinarily are not
permitted in the area, and
3) Wagers are placed, and winners determined in the presence of all
persons wagering in the game.
Special Rule—Distribution Of Low Cost
Articles
If a non profit organization distributes low
cost items ($7.20 or less) and the distributions are incidental to the
solicitation, these distributions may not be considered an unrelated trade
or business.
"Incidental" means:
• Person receiving item did not request
it.
• Person receiving item receives it without giving his/her consent.
• Item is accompanied by a request for a charitable contribution.
• Person receiving item may keep it even if no contribution is made.
