Identifying Unrelated Business Income

by Jared J. Young, CPA, CGFM, Senior Associate

Posted on October 9, 2018

It is a common misconception that all revenues generated by non-profit organizations are tax-exempt. However, as more non-profit organizations look to utilize creative avenues of revenue generation to support or expand existing services, each organization must perform the necessary analysis to determine whether all of the organization’s income is still related and exempt from taxation at corporate rates.

Unrelated business income (UBI) is defined by IRS Publication 598 as income generated from a regularly executed trade or business not substantially related to the organization’s exempt purpose. Examples include:

  • Exploitation of an exempt activity (sale of advertising space within a periodical published by an exempt organization that contains editorial material related to the accomplishment of the organization’s  exempt purpose)
  • Sale of endorsements (an exempt scientific organization sells endorsements of laboratory equipment)
  • Sales of scientific or fiction books within an art museum gift shop
  • Boarding or grooming services provided by an organization with the exempt purpose of eliminating animal cruelty

There are several exclusions provided by the IRS on specific activities that are excluded from the definition of unrelated business income. Common examples include:

  • A trade or business conducted for the convenience of an exempt organization’s members or employees  (laundry service at a state university for its students)
  • Convention or trade show activity
  • Selling donated materials if substantially all of the merchandise is received through gifts or donations

The first step to properly reporting unrelated business income is to recognize it when it occurs.  Non-profit organizations should be aware of signs that income could be taxable especially when venturing into new revenue streams. Knowing that income will be taxable prior to receipt will allow your organization to properly plan and report the income accordingly on the Form 990-T.