Unrelated Business Income Taxes (UBIT) are for the taxes assessed on profits derived from non-exempt activities. In most cases, UBIT refers to income and profits that a nonprofit generates from its activities. The most common example is the museum gift shop, which works like a for-profit business in the non-profit museum. If an Illinois nonprofit conducts a majority of its activities in a for-profit manner, then it can lose its non-profit (and tax-exempt) status.
Nonprofits that generate income from for-profit activities will need to pay a taxes on that income (hence, the unrelated business income tax). The reality, however, is that few nonprofits pay UBIT, and if your business is generating some income from an unrelated business, then it’s essential to contact a Chicago nonprofit attorney as soon as possible. At James C. Provenza & Associates, we can help with your unrelated business income taxes, and possibly devise strategies to help you avoid these taxes.
For a free consultation with our nonprofit law firm, call us today at (847) 729-3939.
Strategies for Avoiding UBIT
Income generated from unrelated business activities are, for the most part, taxed at the corporate tax rate. This means that the taxes you pay on unrelated business income often fall around 15% to 35%. Moreover, if the unrelated business earns more than $1,000 in profit a year, then the nonprofit will have to file a UBIT tax return.
There are countless state and federal laws regarding UBIT, but with the help of an experienced and expert nonprofit attorney, there are ways that you can avoid these taxes. Below are just a few strategies that you can employ.
Converting incomes to royalties
There are many exceptions to UBIT, and some types of income, even if the income is unrelated, don’t necessitate an unrelated business income tax. One example of this is royalties. For example, if your nonprofit publishes a book or makes a movie, then the income generated from the project is subject to UBIT. However, if you transfer the publication rights to a commercial publisher, then the royalties generated won’t (in most cases) be subject to UBIT.
Having volunteers do the work
In general, if unpaid volunteers perform the nonprofit’s work, even if that work generates unrelated income, then the profits are not subject to UBIT. A good example of this is the Girl Scouts organization. Girl Scouts cookies are typically exempt from UBIT, as the sale of these cookies is conducted by volunteers.
Restructuring the activity
In some cases, it may be advantageous to turn an unrelated business into a related business. A nonprofit can complete this change through restructuring its nature and tax-exempt purpose, and then informing the IRS of this change. For instance, imagine that a nonprofit also conducts tours abroad. The IRS might claim that the tours generate unrelated income tax, but if the nonprofit restructures the activity to make it an educational tour, then that income may be exempt from UBIT.
Expanding the nonprofit’s exempt purposes
Similar to restructuring the nonprofit’s activities, you can also expand the nonprofit’s exempt purposes. This generally requires the nonprofit to amend its articles of incorporation. Again, if you restructure, expand, or amend the nonprofit’s tax-exempt purposes, then you must notify the IRS when you file your annual return.
Contact James C. Provenza & Associates in Chicago
If your nonprofit is generating unrelated business income, and you have to pay UBIT, then you should consider getting the expert advice and guidance of an experienced Chicago nonprofit attorney. At James C. Provenza & Associates, we’ve helped numerous nonprofits in the Chicago area with their UBIT and other tax-related issues, and we have the resources and expertise to help you too. For a free, no-obligation consultation, call our nonprofit law firm today at (847) 729-3939.