Most nonprofit revenue is tax-exempt—but not all of it. If your organization generates income from activities that aren’t connected to your mission, you may owe something called Unrelated Business Income Tax, or UBIT.
The IRS uses a three-prong test to determine whether a nonprofit’s income is considered taxable.
- Is it a trade or business? Is the organization selling goods or services in a commercial manner—even without turning a profit?
- Is it regularly carried on? The IRS compares activities to similar for-profit businesses. (Annual fundraising events typically get a pass here.)
- Is it unrelated to the organization’s exempt purpose? This is the most subjective prong—and often the trickiest to navigate.
There are a few common culprits that can yield UBIT, though. Activities that often trigger it include advertising income, consulting services, job listing fees, and sales of logoed merchandise, so look out for those.
It’s also important to be aware that the tax code carves out exceptions for investment income, royalties, rent, capital gains, and activities run substantially by volunteers. Fundraising events and the sale of donated merchandise also typically escape taxation.
Last, it’s worth noting that revenue from activities that directly further an organization’s exempt purpose—even when some participants pay market rates—generally isn’t considered unrelated business income. If unrelated business income exceeds $1,000, a Form 990-T filing is required.
So, while UBIT might not be a four letter word (well, you know what I mean), generating too much unrelated income relative to exempt activities could put tax-exempt status in jeopardy.
