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Understanding Unrelated Business Income

The primary purpose of the unrelated business income tax (UBIT) is the prevention of unfair competition by tax exempt organizations.

It is essential for associations to determine if a trade or business is being conducted regularly and that such trade or business does not qualify for one of the exceptions or modifications to the rules. An association might face loss of exemption if its trade or business activities are significant relative to its overall revenues.

The following four conditions must be met to determine whether an association is engaged in an unrelated trade or business whose income is subject to UBIT:

1. The activity must be a trade or business.
2. The trade or business must not be substantially related to the organization's exempt purposes (except that the association has a need for the profits derived from this activity).
3. The trade or business must be carried on regularly.
4. The trade or business activity or its income must not be excluded from taxation under the Internal Revenue Code (IRC).

Whether or not income is taxable is almost always determined by the nature of the income-producing activity—never by how an association uses the money. After the nature of the activity is examined, the applicability of specific IRC exclusion codes must be considered. How an activity is structured can also determine if its income is excluded from taxation.

If you would like more information on how to navigate the UBIT rules, please call Brian Whitlock, Partner in Charge of Blackman Kallick's Not-for-Profit Tax Practice, at 312-980-2941.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.