When it comes to being a nonprofit organization in Illinois, understanding unrelated business income tax (UBIT) is essential for continual legal compliance as well as nonprofit success and outreach. In short, an unrelated business income tax (UBIT) is a corporate rate tax imposed on the unrelated business income generated by tax-exempt organizations.
Whether you are looking to incorporate tax-exempt, business income that’s related to your nonprofit’s mission, or you need an experienced and knowledgeable CPA and Chicago area nonprofit attorney to guide you through and calculate UBIT, then call Illinois nonprofit attorney James C. Provenza today. At James C. Provenza & Associates, we offer comprehensive, experience-based legal counsel, guidance, and representation to help your nonprofit thrive. Call us today at (847) 729-3939.
Unrelated Business Income Defined
Nonprofits and other tax-exempt organizations in Illinois benefit from federal and state tax exemptions related to the organization’s charitable, educational, or other mission. If an income is not related to this tax-exempt activity, then the nonprofit may have to pay UBIT. According to IRS Publication 598, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:
- The activity is a trade or business — This generally includes any activity conducted for the production of income from selling goods or performing services. Also, the activity must be conducted with intent to make a profit to constitute a trade or business.
- The activity is regularly carried on — Business activities of an exempt organization are considered to be “regular” if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations
- The activity is not substantially related to the exempt purposes of the organization — A business activity isn’t substantially related as long as it doesn’t contribute importantly to accomplishing the nonprofit’s purpose (other than through the production of funds). To determine whether an activity is related, it’s important to look at:
- The size and extent of the activities involved
- The nature and extent of the exempt function that they intend to serve
Taxes on unrelated business income apply to most tax-exempt organizations, which includes charitable, religious, scientific, and other organizations described in 26 U.S. Code § 501(c).
Examples of UBIT
To give you a better, more practical view of UBIT and what it looks like, we included several examples of activities that were determined to be (or not to be) unrelated trades or businesses, in accordance with the IRS’s definitions.
- Example #1: A school facility that rents out its tennis courts. A tax-exempt school uses its tennis courts over the summer to operate a tennis club for the public. The school collects membership fees for this club. A different tax-exempt school leases its own tennis courts to an unrelated individual to use over the summer. In both situations, furnishing the tennis courts in these manners might not further the schools’ exempt purposes of furthering education. Interestingly enough, leasing the tennis court to the unrelated individual might not be subject to UBIT as it’s rent from real property.
- Example #2: A cafeteria in a museum. The art museum is a tax-exempt organization and it operates a cafeteria, attracting staff and visitors and giving them more time to view museum exhibits without having to search for outside restaurants. In this case, the museum might not have to pay UBIT for the cafeteria’s generated income because the cafeteria contributes importantly to the accomplishment of the museum’s exempt purposes and it isn’t unrelated trade or business.
- Example #3: A museum shop. The art museum, a tax-exempt organization, also has a museum shop. Whether the shop’s income is subject to UBIT depends on several factors. For instance, if the museum shop sells reproductions and copies of artworks (from own collection and non-owned collections) for the advancement of the museum’s exempt purpose, then the income from those sales might not be subject to UBIT. However, if the shop sells souvenirs of the city and other items that have no casual relationship to art and the museum’s exempt purposes, and if the income of those goods isn’t intended for the advancement of the museum, then that income might be subject to UBIT.
With all three of these examples, always keep in mind that every situation is unique and requires its own individualized evaluation.
How a Nonprofit Attorney and CPA James C. Provenza Can Help
With years of experience as a CPA and nonprofit lawyer in Illinois, attorney James C. Provenza has helped numerous individuals and organizations with their unrelated business income taxes. We serve the entire Chicago and surrounding area, but by calling our Glenview IL law firm, we can provide experience-backed legal counsel and representation regarding:
- Whether certain aspects of your nonprofit are subject to UBIT
- Calculating your nonprofit’s amount of UBIT
- Determining allowable deductions in your UBIT calculations
- Legal guidance for filing requirements, including Form 990-T and supporting schedules and forms
Healthy nonprofit activity is a benefit for every Illinoisian, and we at James C. Provenza & Associates want to help your nonprofit thrive by providing expert legal counsel and representation. For UBIT and other issues, call our Chicago nonprofit law practice today at (847) 729-3939.