Unrelated Business Income (UBI)

Unrelated Business Income (UBI)§

Definition§

Unrelated Business Income (UBI) refers to income earned by a tax-exempt organization through activities that are not substantially related to its primary exempt purpose. According to the Internal Revenue Service (IRS), the income must meet three conditions to be classified as UBI:

1. It is from a trade or business.
2. It is regularly carried on.
3. It is not substantially related to furthering the exempt purpose of the organization.

Examples§

1. University Bookstore: A university runs a bookstore that sells items like clothing, souvenirs, and snacks. The sales related to educational materials may be exempt, but sales from other items might be considered UBI.
2. Hospitals Leasing Real Estate: If a hospital leases out a portion of its property to a business not related to healthcare, the income from leasing could be viewed as UBI.
3. Charitable Organization: A charity running a regularly-scheduled bingo game, where the winnings are not donated back to the cause, may have to report the proceeds as UBI.

Frequently Asked Questions§

Q1: Why is Unrelated Business Income taxable for tax-exempt organizations? A1: UBI is taxable to prevent tax-exempt organizations from having an unfair advantage over for-profit businesses in the marketplace.

Q2: How is Unrelated Business Income reported? A2: UBI must be reported on IRS Form 990-T, Exempt Organization Business Income Tax Return.

Q3: Are there any exclusions to what is considered UBI? A3: Yes, several exclusions exist, including volunteer labor, convenience of members or employees, and sales in substantial part of donated goods.

Q4: What happens if a nonprofit fails to report UBI? A4: Failing to accurately report UBI can result in penalties, interest, and potential revocation of the tax-exempt status.

Q5: Can income from a passive income source be considered UBI? A5: Generally, passive income from investments, such as dividends, interest, and certain rents, is excluded from UBI.

Related Terms§

• Nonprofit Organization: An organization recognized by law as a public charity, private foundation, or other exempt organization.
• IRS Form 990-T: The tax form used by tax-exempt organizations to report and pay taxes on UBI.
• Tax-Exempt Status: The status a nonprofit organization holds which exempts it from paying certain federal income taxes.
• Trade or Business: Any activity carried out for the production of income from selling goods or services.

Online References§

• IRS Publication 598: Unrelated Business Taxable Income of Exempt Organizations
• National Council of Nonprofits: Unrelated Business Income (UBI)

Suggested Books for Further Studies§

1. “Tax-Exempt Organizations and Constitutional Law” by Bruce R. Hopkins
2. “Nonprofit Law Made Easy” by Bruce R. Hopkins
3. “The Law of Tax-Exempt Organizations” by Bruce R. Hopkins

Fundamentals of Unrelated Business Income (UBI): Taxation Basics Quiz§

Thank you for exploring the intricacies of Unrelated Business Income (UBI) through our detailed explanations and comprehensive quiz. Continue to expand your knowledge in taxation and nonprofit management!