When your association was first created, it most likely applied for tax-exempt status from the IRS.

This allowed the organization to earn income related to the organization’s exempt purposes, and be exempt from certain taxes from that income.

But what happens when the organization earns income that isn’t related to the organization’s exempt purposes? Consider income from insurance programs, magazine publishing, selling membership lists and selling advertising space – these revenue generators are not directly related to the organization’s primary mission.

Even though an organization is tax-exempt, it is still liable for tax on income from unrelated trades or business, or unrelated business income (UBI).

Not sure what income applies?

Currently, IRS regulations define an activity as unrelated if it possesses all three of the following criteria:

  1. It is from a trade or business – generally, this includes any business activity conducted with intent to profit to constitute a trade or business.

2. It is carried out regularly – business activities that show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.

3. It is not substantially related to the organization’s tax-exempt purpose – a business activity that does not contribute importantly to accomplishing that purpose (other than through the production of funds).

Quick Tip

Create a UBI policy for your organization. This policy should clearly classify and designate how income and expenses for unrelated activities will be included in the financial records. This policy should stand up to IRS audit procedures.

If the organization’s UBI equals or exceeds $1,000 it will need to report it to the IRS by filing a Form 990-T, Exempt Organization Business Income Tax Return. Using the Form 990-T, calculate and report unrelated business income and the appropriate tax liability. Note that the IRS taxes unrelated business income at the corporate tax rates.

If an organization’s total anticipated tax for the year equals or exceeds $500, it has to pay a quarterly estimated tax using Form 990-W, Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations.

Don’t forget, the organization must file a Form 990-T yearly in addition to filing the annual information return, Form 990, 990-EZ or 990-PF.

Learn more about UBIT from the IRS.