What to Know about Unrelated Business Taxable Income
By Katie A. Ahern
Here are key points that 501(c)(3) organizations need to keep in mind.
What Unrelated Business Taxable Income Is
Unrelated business taxable income, commonly known as UBTI, generally means any income that an exempt organization earns through business that is unrelated to its tax-exempt purpose.
UBTI matters for two main reasons. First, the UBTI of a 501(c)(3) organization is subject to tax, even though a 501(c)(3) is not generally taxed on its income. If a 501(c)(3) has too much unrelated business activity, it may lose its 501(c)(3) status. However, there is no clear threshold level of unrelated business that compromises tax-exempt status. (In addition, UBTI may present significant issues for 501(c)(3) organizations with outstanding tax-exempt bonds.)
What if the animal shelter in #1 above uses the income it earns from grooming animals for the general public to fund the care of additional unwanted animals? Does that mean the income is now related to the exempt purpose? No, generating income to support the tax-exempt purpose of the organization is not enough to show a relationship to its purpose.
Frequently, 501(c)(3) entities will receive payments from sponsors. Although a straightforward sponsorship arrangement does not generally create UBTI issues, the arrangement may move from sponsorship to advertisement, causing a UBTI problem.
Although a 501(c)(3) is not generally taxed on its income, its UBTI is subject to tax, which is reported on the IRS Form 990-T.