Does Your Non-Profit Have UBIT?

Are you thinking “Our non-profit is  a tax-exempt organization so why should we have to pay taxes?” When a tax-exempt organization has income that is not related to their exempt purpose it might be required to pay taxes.  An organization is granted tax-exempt status when it completes a tax-exempt application and meets specific criteria.  This gives the non-profit an exemption from paying federal income tax on revenue that is related to its exempt purpose, which also allows tax-deductible gifts from donors.  Income that is not considered related and is regularly carried on is subject to tax and is referred to as unrelated business income tax, or UBIT.

So, what is considered a trade or business; regularly carried on; and not substantially related to the organization’s mission?

Trade or Business

An activity that generally is conducted with the intent to make a profit is considered a trade or business.

Regularly Carried On –

An activity  of an exempt organization is considered regularly carried on if it shows a frequency/continuity in how the revenue is derived.  It is not regularly carried on if it is considered infrequent (such as a silent auction or fundraising dinner).

Not Substantially Related 

An activity  is considered not substantially related to an organization’s exempt purpose if it does not accomplish that purpose, beyond generating income.

Several examples of UBIT might be:

• Advertising income – the selling of advertising in a program or periodical
• Rental income from debt financed activity – Property owned/held to produce income that has debt during the year
• Gambling revenue – The sale of pull-tabs and tri-wheel income.

UBIT is subjected to a rate of 21%.  The organization is subject to paying in estimated tax if it expects the tax to be over $500.  An organization can carry forward its net operating losses and apply them against any income to the extent of 80% of taxable income during that year.

If you are required to file, your organization would file a Form 990-T with the IRS.  In 2020, the IRS finally allowed 990-T’s to be filed electronically.  The filing deadline is the 15^th day of the fifth month after year end (May 15^th for calendar year-end organizations), however a six-month extension is allowed if applied for.  A Minnesota non-profit will also be required to file a MN Form M4NP if they file a Form 990-T.  This extension is automatic with the filing of the Federal Form 990-T extension.

Contact us if you have questions, we are happy to help!

For additional considerations, please reach out to Assurance Solutions Team Associate Director T.J. Sheldon or contact the Assurance Solutions Team at Mahoney.