Unrelated Business Income Tax
Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 USCA 501 organization that is not related to the tax-exempt purpose of that organization.
For most organizations, a business activity generates unrelated business income subject to taxation if:
- It is a trade or business,
- It is regularly carried on, and
- It is not substantially related to furthering the exempt purpose of the organization.
A trade or business includes the selling of goods or services. An activity is regularly carried on if it occurs with a frequency and continuity, similar to what a commercial entity would do if performed the same activity. An activity is substantially related to furthering the exempt purpose of the organization if the activity contributes importantly to accomplishing the organization's purpose, other than for the sake of producing the income itself.
A university runs a pizza parlor that sells pizza to students and non-students alike. The university is a tax-exempt organization and its pizza parlor generates unrelated business income. While the tuition and fees generated by the university are tax exempt, its income from the pizza parlor is not tax-exempt because the pizza parlor is unrelated to the university's education purpose.
A counter-example is a social-service nonprofit that holds a one-time bake sale. While the sale is unrelated to their mission, it is tax-exempt because it is not regularly carried on. Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and they are pursued in a manner similar to comparable commercial activities of nonexempt organizations.
Certain types of income are not considered unrelated business income, such as income from dividends; interest; royalties; rental of real property; research for a federal, state, or local government; and charitable contributions, gifts, and grants. In addition, unrelated business income does not include income derived from the work of unpaid volunteers, income from the sale of donated goods, income from trade shows and conventions, income from legal gaming. The Internal Revenue Service does not consider the receipt of assets from a closely related tax-exempt organization to be unrelated business income.
The IRS taxes unrelated business income at the corporate tax rates (IRC section 11) except for certain section 511(b)(2) trusts which are taxed at trust tax rates. See IRS Publication 598.
UBIT in an IRA
IRAs generally are subject to tax on income that is taxable to most U.S. tax-exempt entities under 26 U.S.C. §511. 26 U.S.C. §408 contains many of the rules governing the treatment of IRAs. §408(e)(1) states: "Any individual retirement account is exempt from taxation under this subtitle unless such account has ceased to be an individual retirement account by reason of paragraph (2) or (3). Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511(relating to imposition of tax on unrelated business income of charitable, etc. organizations)."
In addition, the IRS unequivocally confirms this in the first few paragraphs of Chapter 1 of the November 2007 revision of Publication 598 that IRAs are "subject to the tax on unrelated business income."
Tax on unrelated business income was introduced in 1950. Congress enacted the law because it was concerned about nonprofit organizations having an unfair advantage competing in the same activities as for-profit organizations.
- "Publication 598: Tax on Unrelated Business Income of Exempt Organizations". Internal Revenue Service. March 2012.
- "Unrelated Business Income Defined". Internal Revenue Service. January 23, 2014.
- ""Trade or Business" Defined". Internal Revenue Service. April 18, 2014.
- "Regularly Carried On". Internal Revenue Service. April 18, 2014.
- "Substantially Related". Internal Revenue Service. April 18, 2014.
- "26 U.S. Code § 512 - Unrelated business taxable income". Legal Information Institute. Cornell University Law School. Retrieved September 11, 2014.
- "26 U.S. Code § 513 - Unrelated trade or business". Legal Information Institute. Cornell University Law School. Retrieved September 11, 2014.
- Anderson, Justin; Bean, Diane; Kennedy, Tery; Vecchioni, Michael (December 3, 2012). "UBI Update: The Nonprofit Guide to Unrelated Business Income". 22nd Annual Health Sciences Tax Conference. Ernst & Young LLP.
- Hines, Jr., James R. (January 1999). James M. Poterba, ed. "Non-Profit Business Activity and the Unrelated Business Income Tax". Tax Policy and the Economy 13. MIT Press. p. 57 - 84.
- February 15, 2015, UBIT not always applicable MySolo401K: http://www.mysolo401k.net/unrelated-business-income-tax-ubitubti-facts-definition-solo-401k-self-directed-401k/
- February 15, 2015, 401k Business Financing(ROBS) not subject to UBIT: http://www.mysolo401k.net/401k-business-financing/