Nonprofits, You Might Need to Pay Taxes on Your Unrelated Business Income

As a nonprofit organization, you may be familiar with the concept of tax-exempt status. However, it's important to understand that there are some types of income that are not exempt from taxes, known as unrelated business income (UBI) tax.

• According to the National Council of Nonprofits, about 30% of nonprofits have unrelated business income.
• A survey conducted by the Nonprofit Finance Fund found that 11% of nonprofits reported paying UBIT in 2018.
• The total revenue generated by UBIT for nonprofits was $9.9 billion in 2016, according to the Urban Institute.
• The number of Form 990-T tax returns filed by exempt organizations has been increasing steadily over the past decade, with a total of 45,408 returns filed in 2018.
• The most common source of UBIT for nonprofits is rental income from real estate that is not used for the organization's exempt purpose.

It's important to note that the rules and regulations around UBIT can be complex and vary depending on the specific circumstances of each organization. Nonprofits that are unsure about their obligations when it comes to UBIT should consult with a tax professional or legal counsel to ensure compliance with tax regulations.

What is Unrelated Business Income Tax?
Unrelated business income tax is a tax on income that is earned by a nonprofit organization through a trade or business that is not related to the organization's primary exempt purpose. The purpose of this tax is to prevent nonprofit organizations from using their tax-exempt status to gain an unfair advantage over for-profit businesses.
Examples of Unrelated Business Income

Here are fifteen types of income that may qualify as unrelated business income: 

1. Income from a gift shop or merchandise sales that are not related to the nonprofit's mission or purpose.
2. Advertising income from a publication that is not related to the nonprofit's mission or purpose.
3. Rental income from real estate that is not used for the nonprofit's mission or purpose.
4. Income from consulting or professional services that are not related to the nonprofit's mission or purpose.
5. Income from selling or licensing intellectual property that is not related to the nonprofit's mission or purpose.
6. Fees charged for access to a facility that is not related to the nonprofit's mission or purpose.
7. Income from a fundraising event that is not related to the nonprofit's mission or purpose.
8. Royalties from the sale of products or services that are not related to the nonprofit's mission or purpose.
9. Rental income from equipment that is not related to the nonprofit's mission or purpose.
10. Income from a joint venture or partnership that is not related to the nonprofit's mission or purpose.
11. Income from a subsidiary or affiliate that is engaged in unrelated business activity.
12. Fees charged for access to a research database or other resource that is not related to the nonprofit's mission or purpose.
13. Income from an investment in a business that is not related to the nonprofit's mission or purpose.
14. Income from a lottery or raffle that is not related to the nonprofit's mission or purpose.
15. Income from a catering or food service operation that is not related to the nonprofit's mission or purpose.

Reporting Unrelated Business Income Tax
Nonprofit organizations that earn unrelated business income are required to report it on Form 990-T, also known as the Exempt Organization Business Income Tax Return. The organization must file this form if it has gross income of $1,000 or more from unrelated business activities.

In addition to reporting the income, the organization must also calculate and pay any taxes owed on this income. The tax rate for unrelated business income varies depending on the amount of income earned, but it generally ranges from 21% to 28%.

It's important for nonprofit organizations to understand their obligations when it comes to unrelated business income tax. Failing to report or pay taxes on unrelated business income can result in penalties and potential loss of tax-exempt status.


Consequences of Not Reporting UBI
If a nonprofit fails to file Form 990-T to report their unrelated business income tax (UBIT), they may face penalties and potential loss of tax-exempt status.

The penalty for failing to file Form 990-T is $20 per day, up to a maximum of $10,000 or 5% of the organization's gross receipts, whichever is less. Additionally, if the IRS determines that the failure to file was willful, the penalty increases to $1,000 per day, up to a maximum of $50,000.

In addition to penalties, failing to report UBIT can also jeopardize a nonprofit's tax-exempt status. If the IRS determines that a nonprofit is engaged in a substantial amount of unrelated business activity and has not reported it, the organization may lose its tax-exempt status.


Unrelated business income tax can be a complex topic for nonprofit organizations to navigate, but it's an important aspect of maintaining tax-exempt status and ensuring compliance with tax regulations. By understanding what types of income qualify as unrelated business income and how to report it, nonprofit organizations can protect their tax-exempt status and continue to serve their communities in a financially responsible manner.