Unrelated Business Income

Non-profit organizations are exempt from federal income tax on income earned from performing their tax-exempt functions and on functionally related businesses. Income from rents, royalties, interest, dividends, and capital gains is also generally not taxable.

Income from a trade or business, regularly carried on, and unrelated to the exempt function of the organization is subject to taxation as unrelated business income (UBI). While UBI is not necessarily a threat to continued tax-exemption, it is an element that must be captured, documented, reported to the Internal Revenue Service, and on which tax must be paid when due. This is also an area of close scrutiny from the general public, small business interests that fear unfair competition from tax-exempt organizations, Congress, and from the IRS that is charged with seeing that all tax on UBI is paid.

Many sources of income that would otherwise escape taxation as UBI become taxable when the income source is debt-financed. Gains from the sale of such property can also be taxed as UBI. Careful structuring of the debt associated with these income sources can mitigate or eliminate this tax.

We constantly monitor changes in IRS thinking on UBI issues and new developments in this area through review of new cases, rulings, and announcements. Careful structuring of contracts and business arrangements can prevent a positive income source from being taxed as UBI.

Our unmatched experience can help your organization eliminated or minimize its exposure to unrelated business income issues.

©2008 Ronnie C. McClure, PhD, CPA