What is the UBI Tax that is applicable to the Non Profit Organization?
Even though your non-profit organization may be recognized as being tax exempt, it could still be liable for tax on its unrelated business income (UTI). Hence the term UBI Tax!
What is Unrelated Business Income?
The IRS has defined an activity as an unrelated business (and subject to unrelated business income tax) if it meets three requirements:
1. It is a trade or business,
The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services.
2. It is regularly carried on, and
Business activities of an exempt organization ordinarily are considered regularly carried on "if they show a frequency and continuity, and are pursued in a manner similar to, comparable commercial activities of nonexempt organizations."
3. It is not substantially related to furthering the exempt purpose of the organization.
The IRS has stated that "to determine if a business activity is substantially related requires examining the relationship between the activities that generate income and the accomplishment of the organization's exempt purpose."
Clearly, the IRS wants the activities that generate the income to be related to achieving the Non-Profit Organization's exempt purposes, in order to treated as being substantially related and thus exempt from the UBI Tax!
The IRS tax code states that "an exempt organization that has $1,000 or more or gross income from an unrelated business must file Form 990-T."
Thus, if your organization meets criteria of having $1,000 or more of UTI income, then it has an obligation to file Form 990-T. This is in addition to the obligation to file the annual information return, Form 990, 990-EZ or 990-PF.