Unrelated Business Income

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Unrelated Business Income

Income a nonprofit organization produces on a regular basis from a trade or business that is not connected to its ordinary operations. For example, a charity may sell t-shirts at a profit to the general public. While there are a number of exemptions, the IRS taxes unrelated business income at ordinary corporate tax rates.
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After reducing their gross unrelated business incomes by allowable deductions, only about half of the 40,676 organizations that were required to file Form 990-T reported unrelated business income tax liability for Tax Year 2005.
Overall, trusts reported 93 percent of their gross unrelated business incomes as investment income, compared to 14 percent for corporations.
Gross unrelated business income reported by charitable and other types of tax-exempt organizations increased 14 percent between Tax Years 2004 and 2005, surpassing $10 billion for the first time.
The majority of all organizations, 63 percent, that filed Form 990-T for Tax Year 2005 reported gross unrelated business income of $10,000 or more.
Most VEBA's are formed as trusts, and, like the section 401(a) and 408(e) trusts, a large portion of their unrelated business incomes come from investments.
Overall, 35,540 organizations reported $7.9 billion of gross "unrelated business income" (UBI) on Tax Year 2001 Forms 990-T filed during 2002 and 2003, which represented 8-percent fewer filers and 6-percent less in gross UBI, compared to Tax Year 2000.
Unrelated business (positive) taxable income (UBTI) and the associated unrelated business income tax (UBIT) reported on Form 990-T dropped sharply for Tax Year 2001.
(The various types of tax-exempt organizations subject to the unrelated business income tax provisions are described, by Code section, in the Appendix to this article.) IRC section 501(d) religious and apostolic organizations, farmers' cooperatives, and section 4941(a)(1) "nonexempt charitable trusts" report taxes on forms other than Form 990-T.
Gross unrelated business income reported by charitable and other types of tax-exempt organizations increased 4 percent between Tax Years 2005 and 2006.
An organization that receives $1,000 or more in gross unrelated business income in a tax year is required to file Form 990-T, Exempt Organization Business Income Tax Return, which is used to determine the amount of unrelated business taxable income and the associated unrelated business income tax liability.
Additionally, there is a 12.5 percent increase in the number of organizations reporting gross unrelated business income of less than $10,000.
Total tax reported on Form 990-T, which comprised the sum of the unrelated business income tax and certain additional taxes, less credits, was $556.2 million.