Nonprofit organizations are generally charitable, educational, or religious entities promoting a goal within the local or specific community. Under most circumstances, the nonprofit organization will fall under the tax exemption status as outlined by the Internal Revenue Service (IRS) under 501(c)(3) structure. Providing nonprofit organization owners a way to save money on income, the tax exemption is an effective method.
Being classified as tax exempt does not automatically keep you from paying any taxes. Meeting specific criteria for income generated, your nonprofit may still be liable for certain taxes. The IRS may impose an Unrelated Business Income Tax (UBIT) on your organization.
Your Nonprofit and the Unrelated Business Income Tax
Determining if your nonprofit is subject to the UBIT depends on the nature of the generated income. Imposing the UBIT is based on the amount of the generated gross income from sales or services. In order to be eligible for tax, the unrelated business income must meet all three criteriaimposed by the IRS.
1. Is the generated income from a trade or business?
The income comes from a trade or business as a means to generate a profit from a specific activity. If your nonprofit organization is selling goods or providing services for a set price to obtain a profit, imposing the UBIT may be the result.
2. Is the activity regularly carried on?
Continually selling goods or services may result in imposing the UBIT on your nonprofit. Even if you only do the activity at specific times of the year or seasonally, your nonprofit organization may need to pay taxes on the income.
3. Is the activity not substantially related?
An activity not substantially related to the nonprofit organization’s exemption purpose may result in the UBIT. The IRS may examine the relationship between the generated income and your nonprofit organization’s exemption status. If the relationship cannot be verified, your nonprofit may need to pay the UBIT.
Exclusionsand Exceptions of the UBIT
The UBIT is full of complexities. Allowing for the additional funds to be part of the nonprofit organization tax exemption status, the unrelated generated income may fall under specific IRS exclusions and exceptions including interest income, dividends, and other forms of investment income.
The following basic types of activities performed by a nonprofit organization are generally not part of the UBIT structure.
- The labor is a volunteered service.
- The sale of goods is from donated merchandise for extra income.
- The activity is an added convenience for members of the nonprofit.
- The activity is a public game of Bingo.
In order to determine if you are required to pay the UBIT, ask the CPAs at Ernst Wintter & Associates to help. Following the IRS tax guidelines for your nonprofit is essential for keeping your exemption status. As the owner or board of a nonprofit, ensuring the proper handling of income is a must. Failure to report generated income may result in fines or other tax implications.