Unrelated business income

Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 USCA 501 organization that is not related to the tax-exempt purpose of that organization.

For most organizations, a business activity generates unrelated business income subject to taxation if:

A trade or business includes the selling of goods or services with the intention of having a profit. An activity is regularly carried on if it occurs with a frequency and continuity, similar to what a commercial entity would do if it performed the same activity. An activity is substantially related to furthering the exempt purpose of the organization if the activity contributes importantly to accomplishing the organization's purpose, other than for the sake of producing the income itself.

A university runs a pizza parlor that sells pizza to students and non-students alike. The university is a tax-exempt organization and its pizza parlor generates unrelated business income. While the tuition and fees generated by the university are tax exempt, its income from the pizza parlor is not tax-exempt because the pizza parlor is unrelated to the university's education purpose.

A counter-example is a social-service nonprofit that holds a one-time bake sale. While the sale is unrelated to their mission, it is tax-exempt because it is not regularly carried on. Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and they are pursued in a manner similar to comparable commercial activities of nonexempt organizations.

If a nonprofit organization receives income from providing services to outside entities and the performance of those services does not further the organization's mission of the organization, the income may be unrelated business income.

If a nonprofit organization sells advertising in print or on the organization's web site, the income is typically unrelated business income if the advertisements promote the advertiser's business and not the nonprofit organization.

If a nonprofit organization licenses its intangible property and promotes an outside entity's business, the income may be unrelated business income. On the other hand, if the nonprofit organization licenses its intangible property and performs no other services related to the licensing, then the income is consider passive income and it is typically not unrelated business income.

If a nonprofit organization has ownership in an S corporation, the income from the S corporation is typically unrelated business income. Gain or loss from the sale of stock in the S corporation stock is also typically unrelated business income.

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