Unrelated Business Income Tax (UBIT) applies to tax-exempt organizations that earn income from activities outside their core exempt purposes. Filing a UBIT return is done using IRS Form 990-T, officially titled Exempt Organization Business Income Tax Return, which allows organizations to report and pay taxes on their unrelated business taxable income (UBTI).

What Is Unrelated Business Income (UBI)?

UBI is income generated from a trade or business that is regularly carried on and not substantially related to the organization’s tax-exempt mission. For example, a university operating a campus bookstore primarily selling textbooks is related income, but if it runs a coffee shop open to the public competing with local businesses, that income could be classified as UBI.

To qualify as UBI, an income source generally meets these criteria:

  1. It arises from a trade or business involving the sale of goods or services.
  2. The operation is regular and continuous, similar to a commercial enterprise.
  3. The activity does not substantially contribute to accomplishing the organization’s exempt purpose.

Common UBI examples include selling advertising space, operating a gift shop selling unrelated merchandise, or rental income from debt-financed properties. Conversely, most passive income—such as dividends, interest, rents not tied to debt-financed property—and volunteer-run activities are excluded from UBI.

Who Must File Form 990-T?

Any tax-exempt organization with gross UBI of $1,000 or more during its tax year must file Form 990-T. This includes charities, educational institutions, religious organizations, hospitals, labor unions, social clubs, and others engaged in unrelated business activities.

Steps to File a UBIT Return (Form 990-T)

1. Identify UBI: Review all income sources and activities to determine if any generate unrelated business income as defined by IRS criteria.

2. Calculate Unrelated Business Taxable Income (UBTI): Determine your gross income from UBI activities, then subtract ordinary and necessary expenses directly connected to those activities. Remember, expenses must be properly allocated if they support both exempt and unrelated business functions. Also, subtract the $1,000 exemption deduction and consider any net operating losses carried forward.

3. Understand Form 990-T: This form reports your gross UBI, deductions, and calculates the net UBTI and tax due. Specific schedules, such as Schedule A for advertising income, may need to be completed.

4. Gather Records: Compile detailed records of income and expenses related to unrelated business activities, including receipts, payroll, contracts, and estimated tax payments.

5. Complete and File the Form: Fill out Form 990-T accurately, attach necessary schedules, and submit electronically or by mail before the deadline—typically the 15th day of the 5th month after your fiscal year ends (May 15 for calendar-year filers).

6. Make Estimated Tax Payments: If you anticipate owing $500 or more in tax, estimated payments are due quarterly to avoid penalties.

7. Maintain Good Records: Keep thorough, organized documentation of all UBI transactions and filings for future IRS inquiries or audits.

Common Mistakes to Avoid

  • Overlooking the $1,000 gross income threshold, leading to missed filing requirements.
  • Confusing related and unrelated activities, causing incorrect reporting.
  • Neglecting timely estimated tax payments, resulting in penalties.
  • Deducting expenses not directly linked to the unrelated business.
  • Missing filing deadlines.
  • Failing to reassess activities as they may shift from related to unrelated over time.

Tips for Managing UBIT

  • Regularly evaluate your organization’s income sources.
  • Keep separate accounting records for unrelated business activities to simplify tracking and reporting.
  • Consult a tax professional experienced with tax-exempt organizations for complex situations.
  • Educate staff and board members about UBIT to ensure awareness and compliance.

For more on filing Form 990-T, visit our detailed article on Form 990-T – Exempt Organization Business Income Tax Return.

You can also reference IRS resources such as Publication 598 and the Form 990-T instructions for official guidance.