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Does Your Nonprofit Have UBTI?

Even though a nonprofit organization may be exempt from taxation on income-related to its exempt purpose, it is subject to tax on any unrelated business taxable income (UBTI). The IRS regulations are complex in this area, so you must carefully consider if income should be treated as UBTI.

First, look at the organization’s mission as reported to the IRS and the IRS code section that is the basis for its exemption (e.g., 501(c)(3), 501(c)(7)). This information about the organization will help you determine if it has UBTI. Income considered UBTI for one organization may not be UBTI for another.

For the majority of organizations, income is UBTI if it is from a “regularly carried on” trade or business that is not substantially related to the organization’s exempt purpose and not excluded from UBTI by IRS regulations. This definition applies to organizations other than those
exempt under code sections 501(c)(7), (c)(9), (c)(17) and (c)(20). The rules for these types of organizations are outside of the scope of this article.

Author, New Jersey CPA Magazine – November/December 2018

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