Christian Leadership Alliance

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Unrelated Business Income

Most managers of not-for-profit organizations have heard of "unrelated business income" (UBI). Some organizations take great care to avoid UBI, while others, looking for more resources, are more ready to consider new income sources and UBI. The management of an exempt organization must be alert to situations in which there is a possibility of unrelated business income. If UBI is present, care must be taken to comply with laws and reporting requirements and, when applicable, to remit taxes due on a timely basis.

Not-for-profit organizations are supported primarily from contributions and earned revenue from activities directly related to their exempt purposes. Sales of religious books, tuition at schools, and campers' fees at a camp are examples of exempt purpose revenue. This income is not subject to federal or state tax on UBI.

On the other hand, income from activities that are not directly related to fulfilling an organization's exempt purposes may be considered unrelated and subject to taxation as unrelated business income. It is important to understand the rules, evaluate operations on a continual basis, and plan for reporting and tax compliance.

UBI can exist in a charitable trust. A charitable remainder trust that has any UBI loses its exempt status entirely for the year during which UBI is present. For exempt organizations, there are significant penalties for failure to report UBI and to remit taxes when due. In extreme situations, the tax exemption of the organization may be at risk.

There are two broad categories of unrelated business income. One is, as the name implies, income from an unrelated business activity. The other is debt-financed income.

Unrelated Business Activity

Activities that result in unrelated business income have three characteristics: (1) there is a trade or business; (2) it is regularly carried on; and (3) it is not related to the exempt purposes of the organization.

Trade or Business

The trade or business characteristic provides that the activity must be carried on similarly to, or in the manner and style which is typically associated with, a trade or business. An important element of a business enterprise is the expectation of income or profit. When a charity is engaged in selling goods or services which are comparable to goods or services provided by commercial businesses, then the activity could be considered a trade or business.

Regularly Carried On

An activity is regularly carried on if performed with the frequency and continuity that similar activities are performed by commercial businesses. If a particular activity is performed by a commercial business on a year-round basis, it is not regularly carried on by an exempt organization only doing it two or three times a year. However, if an activity is commercially performed one month out of the year, it would be regularly carried on by an exempt organization doing it for that month. Comparison with for-profit businesses conducting such activity is critical.

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