Unrelated Business Income Tax
Type of income tax for nonprofit organizations in America
Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 U.S.C. 501 organization that is not related to the tax-exempt purpose of that organization.
Requirements
For most organizations, a business activity generates unrelated business income subject to taxation if:
It is a trade or business,
It is regularly carried on, and
It is not substantially related to furthering the exempt purpose of the organization.
A trade or business includes the selling of goods or services with the intention of having a profit. An activity is regularly carried on if it occurs with a frequency and continuity, similar to what a commercial entity would do if it performed the same activity. An activity is substantially related to furthering the exempt purpose of the organization if the activity contributes importantly to accomplishing the organization's purpose, other than for the sake of producing the income itself.
Examples
Unrelated to exempt purpose
A university runs a pizza parlor that sells pizza to students and non-students alike. The pizza parlor's workers are paid employees of the university. The university is a tax-exempt organization, and its pizza parlor generates unrelated business income. While the tuition and fees generated by the university are tax exempt, its income from the pizza parlor is not tax-exempt because the pizza parlor is unrelated to the university's educational purpose.
If a nonprofit organization receives income from providing services to outside entities and the performance of those services does not further the organization's mission of the organization, the income may be unrelated business income.
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