UBIT…What is it?

UBIT or UBTI is short for Unrelated Business Income Tax or Unrelated Business Taxable Income. Both terms are commonly used interchangeably. The simple definition of UBIT is: a tax imposed on an organization that is exempt from tax. However, there is nothing simple about UBIT. The following three key qualifications should be considered in order to identify whether an activity would generate UBIT for a tax-exempt organization:

1) Does this activity constitute a trade or business activity? IRS Section 513(c) states that a trade or business is “an activity that is carried on for the production of income from the sale of goods or the performance of services.” The purpose here is to keep an even playing field between nonprofits and for-profit companies. However, keep in mind that an activity where a substantial amount of the work is done by volunteers is not considered trade or business.

2) Is this activity regularly conducted? A business activity is considered regularly conducted if the activity is conducted with frequency and continuity in a manner similar to regular business activity carried on by a for profit company.

3) Is the activity related to the organization’s exempt purpose? Look at how the revenue is being earned rather than for what the income is being used. If the activity does not contribute to accomplishing the exempt organization’s purpose, then it may be considered unrelated and subject to tax. The determination of this qualification is often based on the facts and circumstances of each case.

IRS Publication 598, which can be found on the IRS website (www.irs.gov), provides many detailed examples of activities that were deemed either to be or not to be unrelated business activities.