Unrelated Business Income

Unrelated business income (UBI) is revenue earned by a tax-exempt organization from activities that are not substantially related to its charitable, educational, or other exempt purpose. When a nonprofit earns UBI, it must pay unrelated business income tax (UBIT) at regular corporate tax rates on the net income from those activities. The IRS applies a three-part test: the income must come from a trade or business, the activity must be regularly carried on, and it must not be substantially related to the organization's exempt purpose. Common examples include advertising revenue in nonprofit publications, rental income from debt-financed property, and commercial services sold to the general public. However, there are important exceptions: revenue from volunteer-run activities, activities conducted for the convenience of members or students, and the sale of donated merchandise (like thrift stores) are excluded from UBI. Organizations with gross UBI exceeding $1,000 must file Form 990-T. Excessive unrelated business activity can jeopardize an organization's tax-exempt status if the IRS determines that the commercial activities have become the organization's primary purpose. NonprofitTruth's revenue analysis captures total revenue from Form 990, which includes both related and unrelated business income, and donors can examine the revenue composition to understand how much comes from mission-related versus commercial sources.