Unrelated Business Income Tax

In the past, I have explored the differences between organizing a faith venture business as a non-profit or a for-profit entity. Both of these organizational structures have definite advantages and disadvantages.

For organizations exploring a non-profit business venture, I am frequently questioned over the issue of unrelated business income tax (UBIT). The UBIT tax applies to income earned in activities not “substantially related” to the charity’s exempt purpose. Thrift store operations are automatically exempt. But other business activities need to be designed to actively incorporate the charity’s mission or else to allow room in the budget for UBIT tax expenses.

As is often the case with IRS organizational issues, the definition of “substantially related” has some gray areas that need to be explored. These difficulties arise when organizations see the business as primarily an income generating enterprise to support other charitable activities.

But, overall, the UBIT tax is not to be feared…especially for organizations that are incorporating their mission into the business activity. Just this past week, the Internal Revenue Service has issued an updated Publication 598 on the issue.