fbpx

< Back to Thought Leadership

Are You Underreporting Unrelated Business Income (UBI)?

by Nancy Kirchner, CPA, Manager

Federal law allows nonprofit organizations to engage in a certain amount of income-producing activity that is not related to its exempt purpose. However, the IRS has recently concluded that many exempt organizations are underreporting this activity, and consequently, it is increasing its focus on the unrelated business activities of nonprofit entities.

What is UBI?

Unrelated business income (UBI) is created by activity that is defined as any trade or business that is regularly carried on and is not substantially related to the organization’s exempt purpose. An exempt organization that acts in an excessively commercial manner may risk losing their tax exemption; however, the IRS does not define what percentage is too large.

Exemptions, Exclusions, and Exceptions

Many exemptions, exclusions, and exceptions determine whether the unrelated business income needs to be reported on Form 990-T. The rules are often complicated and complex. Here are a few of the more common exceptions to the reporting requirements:

  • Volunteer Exception – If volunteers, measured by the number of hours worked, do substantially all of the work, the income generated is not UBI.
  • Selling Donated Goods – If the income comes from selling substantially all donated goods that the organization received as gifts or contributions, the income is not UBI.
  • Convenience – An activity carried on for the convenience of its members, students, patients, etc. does not generate UBI.

Potential Unrelated Business Activities

Some of the more common types of activities that could generate UBI are:

  •  Investments in joint ventures
  •  Rental of debt financed property
  •  Corporate sponsorships where there is a substantial return benefit
  •  Advertising – website, sports programs, scoreboards
  •  Sales of merchandise and publications
  • Royalty/affinity income

This information is intended to provide a basic understanding of the issues surrounding Unrelated Business Income transactions. If you have questions or would like to discuss your situation, please contact your Blue & Co. representative or Nancy Kirchner, nkirchner@blueandco.com.

Tax Reform Resource Center

Read More Thought Leadership Articles Like what you read? Subscribe to our newsletter. Click Here.

 

cryptocurrency for not-for-profits

Fundraising Expenses: Know the Rules, And Your Options

By Rick Shields, CPA, Principal at Blue & Co. One of the issues not-for-profits must address is how to raise funds while also properly reporting the associated costs for donor […]

Learn More
Improving Patient Loyalty with Network Integrity | Part Two of a Four Part Series | Text overlay on a photo of a hospital.

Improving Patient Loyalty with Network Integrity

Network Integrity is the ability to keep patients within the organization-defined provider network and can optimize your hospital’s financial and operational performance. Blue & Co.’s Shawn Williams, an Audit Director […]

Learn More
one big beautiful bill signed into law

The One Big Beautiful Bill Is Law—Now What?

By Amy L. Sandlin, CPA, Tax Quality at Blue & Co. On July 4, 2025, President Trump signed into law a sweeping budget reconciliation bill, informally titled the “One Big […]

Learn More