Unrelated Business Income Tax (UBIT) for Nonprofits: What You Need to Know

Can Your Nonprofit Earn Income Without Losing Tax-Exempt Status?

Nonprofit organizations, including churches, charities, and foundations, often explore ways to generate additional income. However, earning income the wrong way can trigger Unrelated Business Income Tax (UBIT) or, worse, put a nonprofit’s tax-exempt status at risk.

If your organization is planning to start a revenue-generating activity, it’s crucial to understand how UBIT applies and what steps you can take to remain compliant while maximizing financial sustainability. To learn more, read on and view our UBIT Decision Tree guide as a resource from us and Jessica Willey, CPA.

What Is Unrelated Business Income Tax (UBIT)?

Unrelated Business Income Tax (UBIT) is a federal tax imposed on nonprofits that earn income from activities not substantially related to their exempt purpose. The IRS evaluates whether an activity is:

1️⃣ Regularly carried out – Is this an ongoing business, rather than a one-time fundraiser?
2️⃣ Unrelated to the organization’s mission – Does it directly further your nonprofit’s tax-exempt purpose?
3️⃣ Resembling a for-profit business – Would a commercial business engage in a similar activity?

If an income-generating activity meets all three criteria, your nonprofit may be required to:
✅ File IRS Form 990-T
✅ Pay Unrelated Business Income Tax (UBIT)
✅ Possibly make estimated tax payments throughout the year

Key Questions for Nonprofits Considering Income-Generating Activities

Before launching a new revenue stream, ask yourself:

✅ Does the activity generate more than $1,000 per year in income?

  • If yes, tax reporting requirements may apply.

✅ Is the activity larger than necessary to fulfill your mission?

  • If the business grows beyond a reasonable scale, it could be classified as unrelated business income.

✅ Is the income substantially related to your exempt purpose?

  • UBIT applies based on how funds are earned—not how they are used. Even if revenue is reinvested into charitable programs, it may still be taxable.

✅ Does the income exceed reasonable thresholds?

  • If an unrelated business generates too much revenue relative to the nonprofit’s overall income, the IRS may question its tax-exempt status.

How to Stay Compliant & Protect Your Tax-Exempt Status

To ensure compliance with IRS nonprofit tax laws, follow these best practices:

1️⃣ Consult a Nonprofit Tax Attorney & CPA (like us!)

  • A nonprofit tax expert can evaluate your income streams and advise on legal structuring options (such as a subsidiary LLC or nonprofit business arm).

2️⃣ Consider State & Local Tax Implications

  • In addition to federal UBIT, property tax, sales tax, and state income tax may apply to revenue-generating activities.

3️⃣ Budget for Compliance Costs

  • Nonprofits should allocate funds for legal and tax advisory services before launching any new business venture.

IRS Reporting & UBIT Compliance: What You Need to File

If your nonprofit owes Unrelated Business Income Tax (UBIT), you will likely need to:

📌 File IRS Form 990-T to report taxable income
📌 Make estimated tax payments if UBIT is due throughout the year
📌 Keep clear records of income sources, expenses, and business activities

Failure to comply with UBIT rules can lead to IRS penalties or, in extreme cases, revocation of tax-exempt status.

FAQs: Common UBIT Questions Answered

❓ Can a nonprofit sell products or services without paying UBIT?

Yes—if the revenue is directly related to the nonprofit’s mission. For example, a museum selling educational books about its exhibits would likely not owe UBIT.

❓ Does renting out nonprofit property trigger UBIT?

It depends. Rental income from real property (like leasing a church hall for community events) is usually exempt. However, if the nonprofit provides additional services (e.g., catering, staffing, or equipment rentals), UBIT may apply.

❓ Are fundraising events subject to UBIT?

Most traditional fundraising events (e.g., charity auctions, benefit concerts) are UBIT-exempt, but ongoing business activities that resemble a for-profit enterprise may be taxable.

❓ Can a nonprofit own a for-profit business?

Yes, but it requires proper legal structuring—often through a subsidiary LLC—to ensure compliance with tax laws.

Need Help Navigating UBIT for Your Nonprofit?

Understanding Unrelated Business Income Tax (UBIT) is crucial for nonprofits looking to diversify revenue streams while staying compliant with IRS regulations.

📞 Contact us today to speak with our nonprofit tax attorney. We help tax-exempt organizations protect their status, minimize tax liability, and operate within legal guidelines.
🔹 Schedule a consultation to discuss your nonprofit’s tax concerns

Let us help you maximize your nonprofit’s impact while ensuring full tax compliance! 🚀

Drew Willey