When filing either a Form 990 (Long) or a Form 990-EZ, you’ll come across reporting any income that was received outside the normal activities of your organization. Even though your organization may be tax-exempt, income from unrelated business activity can be taxed at corporate income tax rates.
Before you try to discontinue any activities that could bring in taxed income, you should understand that tax-exempt organizations are allowed to participate in a regulated amount of business activities that are unrelated to its exempt purposes. Unrelated Business Income becomes taxable if it meets the following qualifications:
Income is From Trade or Business: Trade or business includes any activity done for the creation of income either from selling goods, or from the completion of services. Generally, the IRS sees it as any endeavor motivated by making a profit; therefore, unrelated business income tax can be broadly applied and could cover many activities done through your exempt organization.
Trade or Business is Regularly Carried On: “Regularly carried on” basically means how often and in what method the business is conducted. Even if your activity is not done year round, it could still be considered as “regularly carried on” if the activity is common to the frequency and method of for-profit organizations.
Example: If a for-profit company normally does an activity seasonally, and your exempt organization does that same or similar seasonal activity, then it would be classified as “regularly carried on.” On the other hand, something like a one-time only sale of property wouldn’t fall in this category.
Trade or Business isn’t Substantially Related: Of course, for any activity to be considered as unrelated business, it must not be substantially related to the main purpose of your exempt organization. Regulations state that business activities must essentially contribute to the execution of your exempt organization’s purpose. If not, it’s considered unrelated, and any income made can be taxed.
As with any other tax stipulations or rules, there are some exceptions and modifications. Contact your local tax professional if you find yourself in an unspecified situation with unrelated business income.
Important: Just because your exempt organization can participate in unrelated business activity doesn’t necessarily mean it always should. As mentioned earlier, authorization of unrelated activities should be limited. If operating an unrelated business becomes the primary purpose of your exempt organization, you would risk losing your tax-exempt status.
Report any Unrelated Business Income through your Form 990 or Form 990-EZ with Express990. We work closely with the IRS to provide you the most secure, easy, and accurate tax e-filing experience. Our servers are encrypted, McAfee secure certified, and protected by SSL (Secure Sockets Layer). Your information goes directly to the IRS and no one else.
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