For nonprofits, not all income is created equal. Income that’s related to your organization’s exempt purpose generally remains tax-exempt, but unrelated business income (UBI) can trigger tax liabilities and filing requirements. Understanding which activities generate UBI—and how to manage them—helps protect your nonprofit’s tax-exempt status and avoid surprises at tax time.
What Is Unrelated Business Income (UBI)?
UBI is income from a trade or business regularly carried on that isn’t substantially related to your nonprofit’s exempt purpose. If your gross income from these activities exceeds $1,000 annually, your organization must file Form 990-T and may owe corporate or trust taxes. Some states also impose taxes on UBI, so annual review and planning with tax advisors is essential.
The Three Conditions That Define Unrelated Business Activities
An activity is considered an unrelated trade or business if it meets all these criteria:
- The organization is conducting a trade or business.
- The trade or business is regularly carried on.
- The activity is not substantially related to the organization’s exempt purpose.
Certain income types, like dividends and interest, are excluded by law even if they meet all three.
What Does “Trade or Business” Mean?
It refers to activities carried on with a profit motive, involving the sale of goods or services. The IRS considers nine factors to determine profit intent, such as:
- How business-like the activity is run
- Expertise and advice used
- Time and effort invested
- Expectation of asset appreciation
- Past successes and losses
- Occasional profits versus losses
- Taxpayer’s overall financial status
- Presence of personal pleasure or recreation
A nonprofit’s unrelated business activity is still a business even if it’s not profitable in a given year, but a lack of profit motive may mean it’s not a trade or business.
Regularly Carried On: Frequency Matters
For income to be UBI, the activity must be conducted with a frequency and continuity similar to commercial businesses. This can include seasonal activities or weekly operations. One-time or infrequent events generally don’t count unless significant planning and promotion are involved.
When Is Income Related to Your Exempt Purpose?
Income is related if the activity contributes importantly to your nonprofit’s exempt mission beyond just providing funding. Consider:
- How the activity’s size and scope compare to your exempt function
- Whether dual use of assets (exempt and commercial) changes classification
- If products sold are directly from exempt activities without further processing
- Whether commercial exploitation of exempt function intangibles generates UBI
Documenting the relationship of activities to your exempt purpose regularly—ideally in board minutes—helps maintain compliance and clarify tax status.
