Running a nonprofit doesn’t mean you’re off the hook with the IRS. If your organization earns money from activities unrelated to its exempt purpose, that income may be taxable. The IRS labels such income unrelated business income tax (UBIT).
Here’s a quick guide to how unrelated business income tax works.
What is unrelated business income tax?
The IRS defines unrelated business income as meeting three criteria:
- It’s a trade or business
- It’s regularly maintained
- It’s not substantially related to the organization’s tax-exempt purpose
Unrelated business income tax (UBIT) only applies to tax-exempt organizations, primarily nonprofits. These include:
- 501(c)(3) charities
- Educational institutions
- Religious organizations
- Social clubs
- Trade associations
- Certain trusts
When these tax-exempt organizations earn income from business activities not related to their core mission, the IRS steps in with UBIT to level the playing field between nonprofits and for-profit businesses.
It doesn’t matter that the profits are used for good causes. If the activity itself isn’t tied to your mission, the income might be taxed. Let’s say your nonprofit is focused on animal rescue. That’s your exempt purpose. If you open a side business selling custom pet merchandise that goes beyond donated items and becomes a regular sales operation, the income from that could be subject to UBIT, even if the profits support your mission.
What is the tax rate for unrelated business income?
UBIT is taxed at regular corporate or trust income tax rates, depending on how your organization is structured.
- For most organizations (like nonprofits and charities): The income is taxed at corporate tax rates, which are currently a flat 21%.
- For trusts: If your organization is a trust, it’s taxed at trust rates, which are progressive and can climb quickly to a maximum of 37%.
A relatively small amount of unrelated income can trigger a sizable tax bill if not managed properly.
Do nonprofits pay tax on unrelated business income?
Yes, and that surprises a lot of people. Nonprofits are tax-exempt, but that exemption only applies to income related to their mission.
- If you generate $1,000 or more in gross income from an unrelated business in a tax year, you’re required to file Form 990-T with the IRS.
- If you expect to owe $500 or more in tax, you’re also required to pay estimated taxes during the year, just like a regular business.
Examples of taxable unrelated business income:
- Operating a coffee shop open to the public, not just members or students.
- Selling advertising in a newsletter or on your website.
- Renting out office space or equipment when it’s not tied to your mission.
Examples of excluded income (not taxed):
- Interest and dividends
- Royalties
- Income from research for the public good
- Rents from real property (under certain conditions)
- Volunteer-run activities (like a bake sale staffed entirely by unpaid volunteers)
How is unrelated business income tax calculated?
It starts with calculating your gross income from the unrelated activity, and then subtracting direct expenses tied to earning that income. That gives you your unrelated business taxable income (UBTI).
| Here’s a simplified formula: Gross Income from Unrelated Business – Direct Expenses (like payroll, rent, supplies for that activity) = Unrelated Business Taxable Income (UBTI) |
If that number is $1,000 or more, you’ll need to file Form 990-T.
Keep in mind: certain deductions allowed to for-profit businesses may apply, but you can’t deduct amounts that relate to your exempt purpose. The IRS may also require you to allocate shared costs (like admin staff) between related and unrelated activities.
How to calculate unrelated business income tax: an example
Let’s say a nonprofit theater rents out its space for corporate events. In one year, they earn $10,000 from those rentals. They also spend $2,000 on utilities and cleaning services just for those events.
Their taxable unrelated business income is:
$10,000 income
– $2,000 expenses
= $8,000 UBIT
They’ll need to file Form 990-T and pay 21% tax on that $8,000 = $1,680 owed to the IRS.
How to pay unrelated business income tax
- Track income and expenses separately for any activity that could be unrelated.
- File Form 990-T if your gross unrelated income is $1,000 or more.
- Pay estimated taxes quarterly if you expect to owe $500 or more in UBIT for the year.
- Don’t attach Form 990-T to your regular Form 990. The IRS wants them sent in separate envelopes.
- Make it public if you’re a 501(c)(3)—any Form 990-T filed after August 17, 2006, must be available for public inspection.
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When is Form 990-T due?
For most exempt organizations, Form 990-T is due annually by the 15th day of the 5th month after the end of their tax year.
Do nonprofits have to publicly disclose unrelated business income?
If your organization is a 501(c)(3), then you’re required to make your Form 990-T available for public inspection if it was filed after August 17, 2006.
That includes not just the form itself but any schedules, attachments, or supporting documents that relate to the tax on your unrelated business income. The idea is to keep financial transparency front and center, especially when a tax-exempt nonprofit is earning taxable income on the side.
You must keep these records available for three years, starting from the due date of the return, including any extensions. You can provide physical copies or post them online, and anyone can request to see them.
Note: This disclosure rule only applies to 501(c)(3)s—not to other types of exempt organizations like social clubs or business leagues.
Do you have any further questions about UBIT?
Understanding how unrelated business income tax works can help you stay compliant, avoid penalties, and make informed decisions about how to grow or diversify your revenue streams.
If you’re unsure whether something counts as unrelated business, check in with our team.
For further reading, consult IRS Publication 598.
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