Unrelated Business Income Tax (UBIT) for Nonprofits: What You Need to Know

Even tax-exempt organizations can owe income tax. If a nonprofit regularly runs a business activity that isn’t substantially related to its mission, the profit from that activity is called unrelated business taxable income (UBTI)—and it can be taxed under UBIT.

How the IRS decides what’s “unrelated” (the 3-part test)

An activity is generally unrelated if it is:

• a trade or business,
• regularly carried on, and
• not substantially related to your exempt purpose (raising money alone doesn’t make it related).

Quick examples

• Likely UBIT: Selling ads in your newsletter; year-round public café run by a charity; renting out equipment to the public.
• Likely not UBIT: Volunteer-run bake sale; a school bookstore for students; selling donated goods at a thrift store (see exceptions below).

Common exceptions & exclusions (where UBIT often doesn’t apply)

• Volunteer exception: If substantially all the work is performed by unpaid volunteers.
• Convenience exception: Activities run primarily for members/students/patients/employees (e.g., a hospital cafeteria for patients).
• Donated-goods exception: Selling donated merchandise (typical thrift model).
• Passive investment income: Most dividends, interest, royalties, certain capital gains, and many rents from real property are excluded from UBTI (watch the special rules below).
• Qualified sponsorships vs. advertising: Acknowledgments (name/logo only, no calls-to-action or pricing) are generally not UBIT; advertising usually is.

Special rules you should know

• Debt-financed income (IRC §514): If an investment or rental property is financed with debt, part of the income can become UBTI, even if it would otherwise be excluded.
• Real-property rents: Rents from real property are often excluded, but the exclusion can be lost if you provide substantial services, rent too much personal property with it, receive rents from a controlled entity, or the property is debt-financed.

The $1,000 rules (two different ones)

• File if gross is $1,000+: If your nonprofit has $1,000 or more of gross income from unrelated business activities during the year, you must file Form 990-T.
• Specific deduction of $1,000: When computing taxable UBTI, organizations get a $1,000 specific deduction (one per organization).

Siloing: track each business separately

Under IRC §512(a)(6), nonprofits with more than one unrelated trade or business must compute UBTI separately for each “silo” (you can’t use a loss from one to offset profit from another, except certain pre-2018 NOLs). The final regs allow using the first two digits of NAICS codes as a safe way to identify silos.

Tax rates, estimates, and e-filing

• Rates: Most organizations pay UBIT at corporate tax rates (trust-form organizations use trust rates).
• Estimated taxes: If you expect to owe $500 or more of UBIT for the year, pay quarterly estimates (use Form 990-W as a worksheet).
• Due date & e-file: Form 990-T is generally due the 15th day of the 5th month after your year-end (May 15 for calendar years) and is generally required to be e-filed. Include a Schedule A (990-T) for each separate trade or business.

California note (in addition to federal)

If your organization has UBTI in California, you may need to file FTB Form 109 (Exempt Organization Business Income Tax Return) and pay tax at the corporate or trust rate, depending on your form. For most nonprofits (non-pension trusts), Form 109 is due the 15th day of the 5th month after year-end; pension trusts file by the 4th month. California now offers e-file for Form 109.

Typical UBIT triggers...

• Advertising (print, web, social) versus pure sponsor acknowledgments.
• Facility rentals to the public with services (A/V techs, catering, security beyond customary landlord services).
• Debt-financed rentals/investments (e.g., leveraged real estate funds).
• Operating businesses aimed at the general public (gift shops, cafés) that go beyond the convenience exception.

Simple checklist

• Map every money-making activity to the 3-part test above.
• Identify exceptions/exclusions that may apply.
• If any activity looks unrelated, assign an NAICS “silo” and track income/expenses separately.
• Watch for debt-financed property and advertising vs. sponsorship distinctions.
• If gross unrelated income ≥ $1,000, plan on Form 990-T (+ Schedule A per silo); evaluate estimates if projected UBIT ≥ $500.
• For California activities, check Form 109 requirements.

FAQ

Does an annual gala trigger UBIT?
Occasional events generally aren’t “regularly carried on.” But selling ads in the gala program or running a year-round public bar at your venue may be UBIT. Facts matter.

Can we thank sponsors on our website?
Yes—name/logo acknowledgments are fine. Avoid comparative claims, pricing, calls-to-action, or endorsements, which turn it into advertising (usually UBIT).

Are real-estate rents always excluded?
Often, but the exclusion can disappear with substantial services, too much personal property, controlled-entity issues, or debt-financing.

We have multiple small activities—can we net them?
Not across different silos after the TCJA rules; each unrelated trade/business is computed separately.