The Basic Principles of Unrelated Business Income

Tax Professionals' Resource
August 20, 2012 — 1,473 views  
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Unrelated business income refers to an activity that has no direct correlation to an organization's purpose. The Internal Revenue Service states that funds received relating to trades or business activity can be considered part of this type of income. Additionally, funds that are raised through regular activities and are not substantially related to furthering the exempt purpose of an organization can be classified as unrelated business income.

However, unrelated business income tax (UBIT) can impact organizations even if they are tax-exempt. A company that has $1,000 or more of gross income from an unrelated business activity must complete Form 990-T. Meanwhile, the business is responsible for estimated tax if it anticipates the tax for the year will be $500 or more.

Each company must complete a separate Form 990-T, unless it is a title holding corporation or an organization that files a consolidated return.

What is Form 990-T?

There are several purposes for this document, as it allows companies to report any unrelated business income. However, the form is also necessary to satisfy other federal regulations, including determining UBIT liability, providing information about proxy tax liability and claiming a refund of income tax paid by a regulated investment company or real estate investment trust based on undistributed capital gain over an extended period. Organizations may request a credit for specific federal excise taxes paid or for previously supported small employer health insurance premiums.

Certain organizations must submit this document, as failing to do so could incur significant fees and penalties. For example, domestic or foreign organizations that conducted unrelated business or trade and received a gross income of $1,000 or more must complete the document. The IRS defines gross income as the gross receipts minus the cost of goods.

Other institutions are impacted by the aforementioned document, including colleges, universities and fiduciaries for specific kinds of trusts.

Special rules for certain types of organizations

Other factors should be considered when companies determine whether they need to complete Form 990-T. Businesses should examine the definition of UBIT described in Internal Revenue Code sections 501(c)(7), 501(c)(9), 501(c)(17) and 501(c)(20).

For instance, these segments explain that corporations' dividends received deductions should not be included in determining unrelated business tax income. This could impact an organization, as it could lower the total income it would include in the document. 

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