When is Unrelated Business Income Taxable?

If your nonprofit engages in inactivity unrelated to its exempt purpose, you may have Unrelated Business Income that is taxable. Unrelated Business Income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.

For example, let’s say your nonprofit’s exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts. In order to raise extra funds for the organization, your nonprofit leases studio apartments to artist tenants and operates a dining hall primarily for those tenants. These activities do not contribute importantly to accomplishing the organization’s exempt purpose. Therefore, they are unrelated trades or businesses. The excess of unrelated business income over the allowable deductions for that income results in UBIT.

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