Generally, non-profit organizations are tax-exempt in the United States. However, there are some circumstances where a non-profit organization might need to pay taxes on the income it generates. One such instance is with unrelated business income. In this blog post, learn more about unrelated business income and its ramifications on your non-profit organization, religious community, or educational institution, even with tax-exempt status.
What is Unrelated Business Income?
According to the IRS, unrelated business income is a trade or a business that is regularly carried on and not substantially related to “furthering the exempt purpose of the organization.” The income generated from these other activities would be fully taxable.
Unrelated Business Income Examples
Some examples of unrelated business income include:
● Charging parking fees for popular nearby event venues
● Renting space to an unrelated party to generate income
● Advertising for local businesses outside of the scope of sponsorship
● Selling or renting equipment to people outside of the organization for non-related purposes
● Convenience food items at a university bookstore
How to Determine Unrelated Business Income
The best way to determine how much-unrelated business income your non-profit organization generates is to identify what your non-profit’s mission is and what activities support that mission. This will be different for every organization. Then, look through finances and expenses to see what income-generating activities support that mission and which don’t.
There are so many different types of charitable initiatives that it is impossible to say that unrelated business income is the same across different organizations. What counts as unrelated business income for one organization is might be the main tax-exempt income for another organization. A non-profit attorney or a tax specialist can give your organization more specific insight into how to comply with the IRS policies for unrelated business income.
Unrelated Business Income Tax Exclusions
There are some allowable exclusions for unrelated business taxable income for tax purposes. For most non-profit organizations, these exclusions include:
● Qualified trade show income
● Certain capital gains
Qualified Corporate Sponsorships
Corporate sponsorship payments can count as related and unrelated business income. “Qualified” corporate sponsorship payments do not have to be included in a non-profit’s unrelated business taxable income calculations. However, to qualify as a tax-exempt corporate sponsorship, there must not be any expectation that there will be a return benefit.
How is Unrelated Business Income Taxed?
If a non-profit organization has a gross unrelated business taxable income of $1,000 or more, it must file Form 990-T to report the unrelated business income and to pay taxes. At the time of this writing, the rate that non-profits must pay is the flat federal corporate income tax rate of 21%, after any related deductions.
For non-profit organizations that expect to have unrelated business income regularly, the organization likely needs to make quarterly tax payments. Specifically, if it anticipates it will have an unrelated business income of more than $500, it needs to make quarterly estimated tax payments.
Consequences of Too Much Unrelated Business Income
To some extent, the IRS allows some very small amounts of unrelated business income. However, a non-profit organization can lose its tax-exempt status if an excessive or large amount of its income comes from unrelated business income. The IRS does not have a specific amount of unrelated business income that it allows. Any determination of loss of tax-exempt status related to excessive unrelated business income would occur on a case-by-case basis.
Put IRS Compliance First
The IRS has increased the frequency of reviewing and enforcing unrelated business income as it relates to the tax-exempt status for non-profit organizations. Specifically, the laws surrounding unrelated business income require that organizations know where their income comes from. While this might seem scary, there is no reason to be concerned as long as income is correctly calculated, reported, and taxed.
Even if the income generated by unrelated business operations supports charitable endeavors, it still does not have coverage under tax-exempt status. To protect your organization’s tax-exempt status, it is critical to put IRS compliance first within accounting practices to promote transparent and accurate reporting.
Contact a Chicago Non-Profit Lawyer
It is important to remain compliant with your organization’s tax responsibilities with the IRA. Speaking with a Chicago non profit taxes lawyer, like James C. Provenza & Associates can help to get answers to any questions that you have about unrelated business income and its implications on your tax-exempt status Contact James C. Provenza & Associates, P.C. at (847) 729-3939 or by filling out our online form.