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What You Need To Know About UBIT

A tax-exempt organization is not taxed on income derived for its tax exempt purpose; however, income from activities unrelated to the tax-exempt purpose may be subject to unrelated business income tax.

The IRS describes unrelated business income (UBIT) as income that is derived from a trade or business that is regularly carried on by the organization, and that is not substantially related to furthering the organizations’ exempt purpose.

Exempt organizations with gross unrelated business taxable income in excess of $1,000 are generally required to file a Form 990-T annually. A state form may also be required. Significant penalties may apply for failure to timely file these forms.

Transactions that are generally excluded from UBIT are as follows:

  • Investment income from dividends, interest, annuities and royalties
    (unless debt- financed)
  • Gains and losses from disposition of property
  • Rents from real property (unless debt-financed)
  • Fundraising income from which substantially all work is performed by
    volunteer labor without compensation, such as from bake sales
  • Income from sales of donated merchandise received as gifts or contributions

Transactions that may trigger UBIT include:

    • Rental or other income derived from debt-financed property
    • Sale of advertising in a publication
    • Investments in private equity

We recommend that tax exempt organizations closely monitor income that they receive which may be unrelated to their exempt purpose.