When starting up a nonprofit, and getting your federal and state tax-exempt status, you may imagine that the only profits you’re able to receive include donations, grants, fundraising, and more. However, this isn’t always the case. Many nonprofits right here in Illinois gain income unrelated to their nonprofit mission. For instance, imagine an education-based nonprofit that sells t-shirts, or the museum that operates a gift shop. If an Illinois nonprofit is making a profit through unrelated business (such as how for-profit corporations make income), then that nonprofit must pay an unrelated business income tax (UBIT).
Failing to pay the UBIT can result in a loss of a nonprofit and tax-exempt status, and so it’s essential to understand what constitutes UBIT, how you can thoroughly document and report such profits, and how you can make UBIT work for your nonprofit in the most advantageous way possible. Fortunately, with years of experience helping many nonprofits throughout Illinois, Chicago IL nonprofit attorney James C. Provenza can help.
If you are starting a nonprofit, or you need an experienced attorney to ensure legal compliance and legal oversight, call attorney Provenza today. In the meantime, you can learn more about UBIT issues for Chicago IL nonprofits below.
What is Unrelated Business Income Tax?
According to 26 U.S. Code § 512, unrelated business income tax (UBIT) defines a nonprofit’s taxable income as, “gross income derived by any organization from any unrelated trade or business regularly carried on by it, less the deductions allowed.” The following code, Code § 513(a), defines an unrelated business as, “any trade or business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable. . . . or other purpose.”
Using these two definitions of taxable income and unrelated businesses, you can reasonably surmise what constitutes UBIT. In general, UBIT is profit derived from 1) trade or business activity, 2) performed on a regular basis, but 3) not substantially related to the exempt purposes of the organization.
A one-time profitable, unrelated activity might not require UBIT, as the unrelated activity must be conducted on a frequent and continuous basis. On the other hand, if the unrelated activity is performed on a recurring basis, the exempt organization will be subject to UBIT.
An organization paying UBIT may take advantage of all the normal deductions allowed to for-profit corporations. These include normal income tax deductions, such as depreciation, salaries, and other similar items.
If an organization is making more than $1,000 (after deductions) through unrelated business, then that nonprofit must file a Form 990-T. If the nonprofit is expected to make more than $500 or more in UBIT, the nonprofit may also need to make estimated tax payments using Form 990-W.
The nonprofit may also have to file supporting schedules. The applicable tax, as part of the UBIT, is determined by Code §511(a), which states that the UBIT is calculated using corporate tax rates.
While calculating UBIT, make sure to include the same tax credits that are available for-profit entities, such as the General Business Credit and the Foreign Tax Credit.
How to File For Your UBIT
Reg. §1.6012-2 states that nonprofits with a gross UBIT (before deductions) greater than or equal to $1,000 will need to file Form 990-T with the IRS. Remember, filing a 990-T is different than Form 990, and you’ll still have to complete this reporting requirement. Even if an organization is exempt from filing Form 990 (such as a church), the organization will still need to file a Form 990-T if the organization has made more than $1,000 in UBIT.
Contact James C. Provenza & Associates, P.C. for Your Nonprofit
Nonprofit organizations in Illinois need to be proactive when determining, calculating, and filing their UBIT. Furthermore, it’s essential to financially prepare for such tax requirements. As such, if you have a nonprofit in the greater Chicago area, then you can benefit from the expertise and experience of Chicago nonprofit attorney James C. Provenza. We’ve helped many nonprofits with their UBIT requirements, and we can provide the counsel and active representation you need to ensure legal and tax compliance.
To speak with attorney Provenza, call our nonprofit law firm today at (847) 729-3939. Free consultations are available.