How do I know if we had income unrelated to our tax-exempt mission?

Income a tax-exempt organization earns in furtherance of its exempt purpose is generally not subject to federal income tax. Organizations may also run income-producing activities unrelated to that purpose, but the income may be taxable. If unrelated activity becomes a substantial part of what the organization does, exempt status itself can be at risk.

Nearly every exempt organization should therefore know where its revenue comes from, and whether any of it is subject to the Unrelated Business Income Tax (UBIT) under Internal Revenue Code §§ 511–514.

When income is taxable

Income is taxable as unrelated business taxable income (UBTI) only if all three are true:

1. It comes from a trade or business: selling goods or performing services for income.
2. The activity is regularly carried on, with frequency and continuity comparable to a for-profit business. A once-a-year fundraiser typically is not.
3. The activity is not substantially related to the exempt purpose. Using the profits for exempt programs is not enough; the activity itself must contribute importantly to accomplishing that purpose.

Statutory exceptions

Even when all three tests are met, the Code excludes certain activities and income types:

Volunteer labor. Substantially all the work performed by uncompensated volunteers. The IRS generally reads "substantially all" as roughly 85% or more of work performed.

Convenience of members. A business run primarily for the convenience of members, students, patients, officers, or employees, such as a hospital cafeteria. Available only to § 501(c)(3) organizations and state colleges and universities.

Donated merchandise. Sales of merchandise substantially all of which was received as gifts (the thrift store exception). Merchandise bought for resale is not covered.

Donor and member lists. Under § 513(h)(1)(B), exchanging or renting lists with another organization eligible to receive deductible charitable contributions. Renting to a commercial marketer falls outside this exception, though it may still qualify as royalty income under § 512(b)(2). That area has generated litigation and warrants professional advice.

Low-cost articles. Items distributed unsolicited and incidental to a charitable solicitation, where the recipient may keep the item whether or not they give. The $5 statutory figure is a 1987 base indexed annually: for tax years beginning in 2026, the threshold is $13.90 or less, measured by the organization's cost.

Qualified sponsorship payments. Payments where the sponsor gets no substantial return benefit beyond acknowledgment of its name, logo, or product line. Advertising (qualitative or comparative claims, pricing, calls to action) is not acknowledgment and can generate UBTI.

Other exceptions, including qualified convention and trade show activity, qualified public entertainment activity, and bingo conducted lawfully under state and local law.

Passive investment income. Section 512(b) generally excludes dividends, interest, annuities, royalties, rents from real property, and gains on property sales. These exclusions can be lost for debt-financed property (§ 514) and for payments from a controlled entity (§ 512(b)(13)).

Reporting

Organizations with $1,000 or more in gross unrelated business income must file Form 990-T. A $1,000 specific deduction applies against net UBTI. Under § 512(a)(6), organizations with more than one unrelated trade or business compute UBTI separately for each, so losses from one generally cannot offset income from another. UBTI is taxed at 21% for corporations and at trust rates for trusts.

The One Big Beautiful Bill Act (July 4, 2025) left the core UBIT framework intact. Proposals to tax name-and-logo royalties, certain research income, and transportation fringe benefits were dropped before passage.

General information, not tax advice. Application is fact-specific; consult a qualified tax professional.