Determine if Your Organization has Unrelated Business Income

Simply stated, income derived from ongoing activities unrelated to a tax-exempt entity’s tax exempt purpose is taxed as if conducted by a comparable for-profit entity. The determination as to whether or not a trade or business is unrelated to the organization’s tax exempt purpose is highly fact specific, and the trade or business must be regularly carried on. Furthermore, the IRS specifically excludes some activities and income from the definition of unrelated business income. For example, the IRS has determined that sales of donated items by volunteers at an on-sight thrift shop are excluded from the definition of unrelated business income. Similarly, a trade or business carried on specifically for the convenience of visitors, employees or members is not taxable. This would include businesses such as a hospital or museum cafeteria. Conversely, an up-scale museum restaurant was held to be an unrelated trade or business subject to taxation.

I recommend: Review the IRS’s Publication 598. Tax on Unrelated Business Income of Exempt Organization for a complete explanation of when and how unrelated business income arises.   See also A Financial Self-Sufficient Guide for Non-Profits.  Furthermore, you can contact the IRS’ exempt organizations division at www.irs.gov/eo or (877) 829-5500 for additional help.

Prepare and Unrelated Business Income Returns

A tax exempt organization that has $1,000 or more in gross income from an unrelated business must file Form 990-T. Form 990-T is filed in addition to filing the annual information return, Form 990, 990-EZ or 990-PF.

I recommend: Get a copy of Form 990-T and review the Instructions for Form 990-T.

File Form 990-T and Extensions

Form 990-T must be filed with the Internal Revenue Service Center, Ogden, UT 84201-0027, by the 15th day of the 5th month after the end of the organization’s taxable year. If the due date falls on a Saturday, Sunday or legal holiday the return is due by the next business day. A Form 990-T filer may request an automatic 6-month extension by filing Form 8868.

I recommend: Download Form 8868 Application for Extension of Time to File an Exempt Organization Return.

Pay Estimated Taxes

An organization must pay quarterly estimated taxes if it expects income to exceed $500. Form 990-W is a worksheet used to compute quarterly estimated taxes. Form 990-W is not sent to the IRS and is kept with the tax exempt organization’s records. Estimated taxes are generally due by the 15th day of the 4th, 6th, 9th and 12th months of the organization’s taxable year. Payments can either be made electronically or mailed with completed Form 8109.

I recommend: Download Form 990-W Estimated Tax on Unrelated Business Income for Tax-Exempt Organizations and Form 8109 Federal Tax Deposit Coupon.

Find out State Law Requirements

In addition to paying Federal taxes on unrelated business income, your organization may have to pay state taxes as well.

I recommend: Contact the state tax agency and state attorney general's office in every state your organization operates in.     

Find out State Law Requirements

In addition to paying Federal taxes on unrelated business income, your organization may have to pay state taxes as well.

I recommend: Contact the state tax agency and state attorney general's office in every state your organization operates in.