Unrelated business income (UBIT) for nonprofits, explained

Tax-exempt status does not mean every dollar your organization earns is tax-free. Congress taxes unrelated business income so that a nonprofit running a business unrelated to its mission does not have an unfair edge over taxable competitors. The tax is often called UBIT, for unrelated business income tax. Most small organizations never owe it, but every board should know how to spot it.

The three-part test

Income is unrelated business income only if all three of these are true.

1. It comes from a trade or business. That generally means any activity carried on to produce income from selling goods or performing services, with an intent to make a profit. An activity does not lose that character because it sits inside a larger set of related activities. Selling advertising in your newsletter is a trade or business, even though the newsletter itself is educational.

2. It is regularly carried on. The IRS looks for frequency and continuity, pursued the way a comparable commercial business would pursue it. Publication 598 contrasts a hospital auxiliary's sandwich stand at a state fair for two weeks, which is not regular, with a commercial parking lot run every Saturday all year, which is.

3. It is not substantially related to your exempt purpose. An activity is substantially related only if it contributes importantly to accomplishing the purpose, other than by raising money. Using the profits for your programs does not make the activity related. The size of the activity also matters: an activity can be related at one scale and unrelated if it grows far beyond what the mission needs.

A job-training program that employs its trainees in a bakery, for instance, may be related to its purpose, while a youth sports league that operates a year-round public car wash with paid staff likely is not.

Common exclusions

Even when all three parts are met, several activities are excluded by law.

• Volunteer labor. A trade or business in which substantially all the work is done without pay is not an unrelated trade or business. Publication 598's example is a retail store run by an orphanage with unpaid volunteers doing substantially all the work.
• Donated goods. Selling merchandise that you received as gifts, such as a thrift shop selling donated clothes and books, is excluded if substantially all the merchandise was donated.
• Convenience. A business carried on by a 501(c)(3) primarily for the convenience of its members, students, patients, officers or employees, such as a college laundry for dormitory linens, is excluded.
• Low-cost articles. Distributing low-cost items, such as address labels, incidental to soliciting donations is excluded under conditions set out in Publication 598. The inflation-adjusted dollar limit is discussed in our donation receipts guide.
• Qualified sponsorship payments. Payments from a business that receives no substantial return benefit other than the use or acknowledgment of its name, logo or product lines are not taxable. Advertising the sponsor's products or services is not "acknowledgment."
• Bingo. Qualifying bingo games that are legal where played, in a jurisdiction where for-profit bingo is not regularly conducted, are excluded.

Passive income is generally excluded

The law also "modifies" unrelated business taxable income by excluding most investment-type income and the deductions connected with it. These generally include:

• dividends, interest, annuities and similar income from ordinary and routine investments;
• royalties, such as payments for the use of your name, trademark or copyright;
• rents from real property; rents from personal property are not excluded, and special rules apply to leases that mix the two; and
• gains and losses from selling property, other than inventory or property held for sale to customers in the ordinary course of business.

The main exception is debt-financed property. If you borrow to buy property that produces income, the share of that income corresponding to the debt is generally taxable, even if it would otherwise be excluded. Income from controlled subsidiaries also has special rules described in Publication 598.

Filing Form 990-T

You must file Form 990-T if your organization has gross income of $1,000 or more from a regularly conducted unrelated trade or business. Gross income here means gross receipts minus the cost of goods sold. Form 990-T is separate from your annual information return, and you file it even if you file Form 990-N; see annual filing requirements.

Key points from the 2025 instructions:

• Due date. The 15th day of the 5th month after your tax year ends (May 15 for a calendar-year organization). Form 8868 gives an automatic six-month extension of time to file, not to pay.
• Specific deduction. A $1,000 specific deduction is allowed once, no matter how many unrelated businesses you run.
• Rate. Organizations taxed as corporations multiply taxable income by 21%.
• Estimated tax. Publication 598 says estimated payments are required if you expect the tax to be $500 or more.
• Public inspection. A 501(c)(3) must make its Form 990-T available to the public, as explained in public disclosure requirements.

For line-by-line help with the return itself, the sister site 990IRS.com has a Form 990-T guide.

The silo rule: each business stands alone

IRC 512(a)(6) requires an organization with more than one unrelated trade or business to calculate unrelated business taxable income separately for each one. Income from one cannot be reduced by a loss from another, and the result for each activity cannot be less than zero. A loss is carried forward only against future income from the same activity. The $1,000 specific deduction is then taken once from the total.

The Form 990-T instructions have you identify each separate business by the first two digits of the North American Industry Classification System (NAICS) code that best describes it. Investment activities use separate codes listed in the instructions.

How unrelated business can affect your exemption

Paying UBIT does not by itself threaten your exemption. The Treasury regulations allow a 501(c)(3) to operate a trade or business, even as a substantial part of its activities, if the business furthers its exempt purposes and the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business. All the circumstances count, including the size of the business compared with your program activities. If unrelated activity starts to rival your programs in time or money, that balance deserves board attention. Some organizations place a large business in a separate taxable subsidiary, and payments from a controlled subsidiary have their own rules in Publication 598.

Keep separate books for each income-producing activity; the recordkeeping guide explains what to keep. If you are planning a new earned-income activity, the 501(c)(3) requirements guide covers the operational test that sits behind these rules.

501Nonprofit.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.