Unrelated Business Income Tax (UBIT) is a critical issue to understand when starting a non profit organization. According to the IRS website, even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.
It is sufficient to report the UBIT on Form 990 alone if the amount of UBIT is less than $1,000. However, if the UBIT is $1,000 or more, Form 990-T is required along with Form 990.
Figuring out which income is related to the organization’s purpose and which is not can be tough to do. For example, according to IRS Publication 598, a volunteer fire department that charges an admission fee for an annual dance might be exempt from UBIT, whereas a fraternity that charges rent to non members may be subject to UBIT.
When trying to navigate the tricky road of UBIT, always consult a CPA.