Have you ever considered another way to increase the Organization’s footprint and reach more constituents, but were not sure if it would be considered unrelated business income because it has an element of product sales?
IRS Publication 958, “Tax on Unrelated Business Income of Exempt Organizations” is a starting point that we frequently refer to when asked this question. The information contained in this publication is designed to assist those in leadership roles with deciding if this new earned income model would generate unrelated business income tax (UBIT). IRS publications can be daunting and hard to read, so we have reviewed this section for you and have provided you with some essential details regarding this issue.
Please note that the information below does not constitute legal advice, and we recommend that legal advice be considered if necessary.
What you need to know
- Unrelated Business Income is income generated by an activity that is regularly carried on and is not related to the Organization’s exempt purpose.
- This activity must be conducted with the intent to make a profit to constitute a trade or business.
- Business activities of an exempt organization ordinarily are regularly conducted if they show a frequency and continuity and are pursued in a manner comparable to commercial activities of nonexempt organizations.
- A business activity is considered unrelated if the activity does not contribute to accomplishing the organization’s mission.
With that being said, when further considering the potential UBIT of a new revenue stream, an organization should also consider where and how the revenue will be generated. Selling products, such as eyeglasses or hearing aids (for example), that benefit the organization’s exempt purpose, is not considered taxable when sold in substantially the same state it is in when the exempt functions are completed. To clarify, if you sell in Texas and donate to people in Texas, it could not be considered taxable. It would be important to maintain records of locations for purchases and donations.
This information just touches the surface, so please bear in mind that there are many other things to consider when evaluating potential UBIT. As you perform an evaluation, always document your thought process. Having written documentation (electronic or hard copy) will help in the event the IRS needs further information.
Should you need clarification or want to engage in a discussion, please do not hesitate to contact us.