How To Stay Tax Exempt With Unrelated Business Income

Tax exempt team learning about unrelated business income

If you’ve filed Form 990 or Form 990-EZ in the past, you are most likely aware of the section requesting information on unrelated business income, also known as UBI, but many tax-exempt filers may be left wondering what this pertains to.

Keeping your exempt status is very important; filing the correct UBI can significantly impact your tax exempt status. If you’re questioning what UBI is and how it impacts your business, you’re not alone.

Many people have questions regarding unrelated business income and its connection to Form 990 tax filings. Here’s what you need to know about how to stay tax exempt with unrelated business income.

How To Stay Tax Exempt with Unrelated Business Income

Before we go any further let’s cover what UBI, or unrelated business income, is.

The IRS defines unrelated business income, for most tax exempt organizations, as income from a trade or business, regularly carried on [we’ll go over this term in a minute], that is not substantially related to the charitable, educational, or other purposes of the organization’s exemption.

Exempt organizations that have $1,000 or more of gross UBI must file IRS Form 990-T. Keep a copy of this form handy as you will need some of its information when filing your 990 Form with TaxBandits.

Tax exempt organizations can participate in a regulated amount of business activities that are unrelated to its exempt purposes.

So before you “jump the gun” and start discontinuing any activities of your 501(c)(3) organization that could bring in taxed income, there’s some more information we’d like to provide you with.

Unrelated Business Income becomes taxable if it meets the following qualifications:

UBI Income From a Trade or Business

A trade or business includes any activity done for the creation of income either from selling goods or from the completion of services. Generally, the IRS sees it as any endeavor motivated by making a profit. Applied broadly, unrelated business income tax covers many activities done by tax exempt organizations.

This information can be added in the Add Sale of Inventory section during the TaxBandits filing process:

Unrelated Business Income - Add Sale of Inventory

Regularly Carried On Trade/Business 

The term “regularly carried on” represents how often a method of business is conducted.

Businesses or organizations with activities that aren’t year-round are “regularly carried on” (if the activity is common to the frequency and method of for-profit organizations).

Example: If a for-profit company normally does an activity seasonally, and your exempt organization does that same or similar seasonal activity, then it would be classified as “regularly carried on.” On the other hand, something like a one-time only sale of the property wouldn’t fall into this category.

Here’s where you would add regularly carried on unrelated business revenue: 

Unrelated Business Revenue

Trade or Business isn’t Substantially Related

Activities considered to be unrelated business must not be substantially related to the main purpose of your tax exempt organization.

Regulations state that business activities must essentially contribute to the execution of your exempt organization’s purpose.

As with any other tax stipulations or rules, there are some exceptions and modifications. Contact your local tax professional if you find yourself in an unspecified situation with unrelated business income.

Reporting Unrelated Business Income with TaxBandits

Reporting your organization’s UBI is easy with TaxBandits. Simply choose “Yes” to report the total gross income from all your unrelated trades or businesses and enter the net UBI from Form 990-T, line 34.

First Step in Filing Unrelated Business Income with TaxBandits

Steps to file UBI with TaxBandits

Word to the Wise: Just because your exempt organization can participate in unrelated business activity doesn’t [necessarily] mean it always should.

If operating an unrelated business becomes the primary purpose of your exempt organization, you would risk losing your tax exempt status.

Report any unrelated business income through your Form 990 or Form 990-EZ with TaxBandits.

We work closely with the IRS to provide you with the most secure, easy, and accurate tax e-filing experience through our comprehensive tax software!

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