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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.

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