Posted by Foudy CPA Group,PC

Impact of Unrelated Business Taxable Income (UBTI)

Impact of Unrelated Business Taxable Income (UBTI)

Unrelated business taxable income (UBTI) defines as an income that is regularly generated by an entity (tax-exempt body) by taxable activities. The income of UBTI is not associated with the chief function of the entities, but it is necessary to generate a particular part of income. A person having IRA (individual retirement arrangement) and these funds generated income known as UBTI. These funds are subject to taxation. Lots of NFPs (not-for-profits) bodies are established to provide public benefits. Their tax-exempt status denotes to tax exemption to federal income tax. It is available for particular income under 501(a) section of IRC (internal revenue (income) code).

A non-profit entity can use the idea that maximum of the revenue they generate through the activities of their organizations is exempt from income tax. When you talk about tax laws, there may be some exceptions to each exemption and exception from each exemption. In case of not-for-profit organizations, the exceptions to general exemption rules are known as UBTI. Nonprofit management and boards must understand this concept and it can be applicable to an organization as per their activities. Two acronyms can affect your organization like unrelated business income tax (UBIT) and unrelated business taxable income (UBTI).

Unrelated Business (corporate) Taxable Income  

If a non-profit organization is carrying out activities that have no relation to the purpose of tax-exempt of an organization, the income from these activities can be subjected to income tax and UBTI.

UBIT is applicable to revenues generated by different commercial activities that may not compliment the scope of non-profit exempt objectives. Always remember that the objective you professed were dedicated to the time when you are ready to apply for exempt status with IRS. If you are earning revenues, it may not offer direct benefit to a charitable cause. It is similar to paying UBIT on this revenue.

Impact of UBTI on Organization 

If a non-profit doesn’t have the potential impression of UBI, it may be a shock for them when IRS knocks their door and requires them to pay the unbudgeted sum to cover the cost of taxes along with interest and penalties. An organization can get protection against rude surprises by finding the advisor who can understand the exceptions to exceptions.

You can avoid UBTI with appropriate planning and property planning. Such as:  

  • Restructure the activities so that free volunteers offered almost 85% of labor in these activities. A person can avoid the characterization of UBTI through unrelated activities.
  • Involve another client in the profit splitting contract. The client must be related to a company where insurance companies are reporting UBTI and making payment of taxes for numerous years. You can get a professional accountant and legal authority to structure your contractual relationships with new insurance companies. It will help you to turn your income in royalty income and UBTI. As a result, you can save thousands of dollars of your tax liabilities. 

Corporations Subject to Unrelated Business Taxable Income

One NFP can be accountable for national income taxes if it can generate particular kind of revenue from activities of business that are not related to tax-exempt purpose. Some events of an NFP may be associated with the exempt purpose of the entity, and some can be unrelated. Generally, the IRS may be interested to know the source of unrelated income instead of its current use. The income from these activities can be taxable. If you have derived income from tax-exempt activities of NFP, you still have to pay taxes.

Almost all organizations are subject to the requirements of UBIT. These may include different charitable entities like educational and religious organization along with research and scientific institutions. The necessities apply to organizations of social welfare, veterans organizations, and advocacy groups along with professional and trade association; employee benefits fraternal organizations and labor organizations. 

Some organizations are not subject to the requirements of UBIT, such as:

  • Corporations organized under Congress act and instrumentalities of the USA Mainly charitable trusts are not subject to tax on a private foundation      
  • Income from businesses or trades is frequently carried on and may not associate with educational, charitable and different other purposes for exemption of an organization. 

You have to check the tax laws of your state about Unrelated business taxable income (UBTI) before treating it as an exemption.




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