The unrelated business income tax is a corporate income tax that applies to unrelated business taxable income (UBTI) earned by a tax-exempt organization or trust. For most tax-exempt organizations, unrelated business income is trade or business income not substantially related to the charitable, educational, or other exempt purpose for which the organization was created.

Example UBTI Scenario for Public Charity

Charity ABC Inc., a Section 501(c)(3) organization based in Miami, Florida, provides food and clothing to the homeless community. The charity receives donations from the general public.  

In 2023, the charity invested $15,000 in Company XYZ LLC (the “Company”), which operates a seafood restaurant in Key West, FL. The Company is organized as a Florida limited liability company (LLC) taxable as a partnership for federal income tax purposes. 

Because the charity is a partner in the Company, the charity received a 2023 Schedule K-1 (Form 1065) showing an allocation of $1,800 in Line 1 (Ordinary Business Income/Loss) and $500 in Line 19A (Cash Distributions).

The restaurant business income allocated to the charity is not substantially related to the charity’s exempt charitable purpose; therefore, the $1,800 of ordinary income is UBTI. The charity needs to file Form 990-T to report the income and pay corporate income taxes.  

Federal Income Tax Reporting

Nonprofit organizations must generally file either a Form 990 (Return of Organization Exempt from Tax) or a Form 990-PF (Return of Private Foundation). 

When a nonprofit organization has gross unrelated business income (UBI) over the $1,000 exemption, it must file Form 990-T (Exempt Organization Business Income Tax Return) to calculate its unrelated business taxable income (UBTI) and pay corporate income taxes on the net amount. 

Individual taxpayers also may have a Form 990-T filing requirement if they have investments in their Individual Retirement Account (IRA) that generate UBTI. For example, if an individual has a self-directed IRA and invested into a partnership that generates ordinary business income, the IRA may have to file Form 990-T.

Please visit our YouTube channel for a video tutorial on how to prepare Form 990-T for a nonprofit organization. 

Additional Information

More information on UBTI can be found in the IRS Publication 598 (Tax on Unrelated Business Income of Exempt Organizations).