What is Unrelated Business Income Tax?
A major benefit to being a nonprofit is the exemption from federal and state income taxes. However, certain activities, considered unrelated to the organization’s core mission, are subject to taxes. This tax is called Unrelated Business Income Tax (UBIT).
To be subject to UBIT, a profit-making activity must be regularly carried on, constitute a generally recognized trade or business and be an activity that is not substantially related to the organization’s tax-exempt status — meaning the activity does not further the mission of the organization.
Normally, royalties are not taxed. Income from selling membership lists to a for-profit organization and from affinity programs are subject to UBIT.
Even though unrelated, profit-making activities are permissible, but they should not consume a significant portion of the nonprofit’s resources. In extreme cases, the IRS may determine that the organization has abandoned its tax-exempt purposes and may seek to revoke its exempt status.
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Disclaimer: LEAD for Pollinators, Inc. is not a CPA or attorney. For legal and accounting advice consult a licensed attorney or accountant.