Unrelated Business Income – what is it and how do I report?

An exempt organization that regularly carries on a trade or business not substantially related to its exempt purpose has unrelated business income. The concept of “unrelated” is defined by the business activity and not how the funds are used by the organization. Just because an exempt organization needs funding does not allow the activity to be “exempt” from taxation.

Under the Internal Revenue Code, 1.513-1(a) describe three criteria that must be met for an activity to be considered “unrelated” and thus taxable:
• The activity must be a “trade or business”
• The trade or business must be regularly carried on; and
• The trade or business is not substantially related to the organization’s exempt purpose.

If an organization has more than $1,000 in gross receipts (total sales less cost of goods sold, plus any income from investments and from incidental or outside operations or sources) from unrelated business income, Form 990-T should be filed. The tax form is due on the 15th of the fifth month following year-end and should be filed with the Department of the Treasury, Internal Revenue Service Center, Ogden, UT 84201.

Certain employees’ trusts defined under section 401(a), and IRA (SEPs and SIMPLEs), a Roth IRA, an Educational IRA and an MSA may have unrelated business income and must file the form by the 15th of the fourth month following year-end.

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