Unrelated Business Income and Form 990-T

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Even organizations that are recognized as tax-exempt under §501(c)(3) are not automatically exempt from all taxes. When these entities generate income from activities that are not substantially related to their exempt purpose, they may be subject to Unrelated Business Income Tax (UBIT). Understanding the rules that govern UBI is essential, as the guidelines are complex and missteps can lead to costly penalties or lost exemptions.

This comprehensive webinar will guide attendees through the critical criteria used to determine whether income qualifies as UBI. The session will also demystify the complex silo rules that require reporting of each unrelated trade or business separately. Additionally, participants will receive step-by-step instruction on completing Form 990-T, including Schedule A, to ensure accurate reporting and compliance with IRS requirements. This is an essential session for any nonprofit professional responsible for financial compliance and reporting.

Your Benefits For Attending:
  • Identify what qualifies as UBI for a §501(c)(3) exempt organization
  • Understand the exceptions and exclusions to correctly report UBI
  • Recognize expenses available to offset UBI
  • Prepare Form 990-T to calculate and report UBIT, including reporting separate trades or businesses on Schedule A

Why this webinar is a must-attend:
Gain the knowledge and confidence to accurately identify and report UBI, minimizing any potential tax liability and ensure compliance with federal regulations.

Level: Beginner/Intermediate
Format: Live webcast
Instructional Method: Group: Internet-based
NASBA Field of Study: Taxes (2 hours)
Program Prerequisites: None
Advance Preparation: None

    1. Introduction
    2. Today's Agenda 00:02:18
    3. What is Unrelated Business Income (UBI)? 00:02:58
    4. Why Does UBI Matter? 00:04:54
    5. Potential Risks 00:08:08 
    6. The Tax Law Framework Behind UBIT 00:08:52
    7. IRC Section 511 Overview 00:09:51
    8. IRC Section 512 Overview 00:12:34
    9. IRC Section 513 00:16:29
    10. IRC Section 513 – Three-Part UBI Test 00:18:06
    11. Exceptions & Exclusions from UBI 00:19:47
    12. Exceptions & Exclusions from UBI Cont’d 00:23:15
    13. Exception to the Exception 00:24:59
    14. Common UBI Activities in Nonprofits 00:27:00
    15. UBI Rule of Thumb 00:31:11
    16. UBI Decision Framework 00:31:40
    17. Examples of Unrelated Business Income 00:33:50
    18. Real-World Case: Girl Scouts Cookie Sales 00:34:18
    19. Seasonal Sales Strategy Avoids UBIT 00:36:00
    20. UBI Example – Hospital Operated Café Open to Public 00:37:39
    21. UBI Example – FoodBbank-Operated Thrift Store 00:40:02
    22. Offsetting UBI with Expenses and Losses 00:45:20
    23. Expenses Allowed to Offset UBI 00:50:07
    24. Managing and Reporting UBI 00:52:24
    25. Filing Requirements 00:53:52
    26. Form 990-T and Schedule A 00:56:37
    27. What is Form 990-T? 00:57:00
    28. Schedule A (Form 990-T) 00:57:31

    Who Must File Schedule A? 00:57:30

    Detailing Unrelated Business Income 00:59:24

    Schedule A Example 01:01:12

    Structure of Schedule A (Form 990-T) 01:03:13

    Schedule A Part I: Reporting Unrelated Trade or Business Income 01:05:00

    Schedule A Part II: Deductions Not Taken Elsewhere 01:09:47

    Schedule A Parts III through XI 01:12:44

    Completing Form 990-T 01:16:42

    Form 990-T Example 01:17:25

    Introduction to Form 990-T 01:18:15

    Before You Begin: Gather Your Information 01:19:14

    Form 990-T Basic Information 01:20:40

    Form 990-T Part I: Total Unrelated Business Taxable Income 01:23:33

    Form 990-T Part II: Tax Computation 01:26:34

    Form 990-T Part III: Tax and Payment 01:28:00

    Form 990-T Part IV: Statements Regarding Certain Activities 01:30:31

    Part V: Supplemental Information 01:32:32

    Resources and Help 01:34:29

    Strategic Planning Tips 01:35:48

    Summary & Key Takeaways 01:36:42

    Presentation Closing 01:41:55

    • Lori Borek

      Lori Borek

      Lori Borek, CPA, is a seasoned tax accountant and Chief Operating Officer of The Borek Group, LLC. Lori recently retired from the Internal Revenue Service after a distinguished 34-year career in federal tax administration. She served in multiple critical roles at the IRS, including Revenue Agent in [...]

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      • 501(c)(3) 00:02:25, 00:10:10
      • Capital Gain 00:22:02
      • Cost Of Goods Sold (COGS) 00:50:16
      • Dividends 00:20:33
      • Exempt 00:02:26, 00:03:20, 00:08:48, 00:13:06, 00:31:22, 00:34:10, 00:47:29, 01:18:22
      • Expense 00:45:29, 00:50:31
      • Form 990-T 00:00:06, 00:02:50, 00:54:33, 00:56:43, 01:16:57, 01:19:23, 01:30:39
      • IRC Section 511 00:09:02
      • IRC Section 512 00:09:03, 00:12:40, 00:20:11, 00:45:38
      • IRC Section 513 00:09:04, 00:18:17, 00:23:22, 00:39:19
      • IRC Section 514 00:09:5, 00:20:52
      • Liability 00:49:31
      • Net Operating Loss (NOL) 00:47:16, 00:52:19, 00:54:23, 01:32:05
      • Nonprofit Corporation 00:05:04, 00:12:00
      • Revenue 00:38:30, 00:39:32, 01:36:30
      • Schedule A 00:02:51, 00:56:44, 00:57:35, 01:00:49, 01:19:24
      • Tax Cuts and Jobs Act 00:55:11, 01:01:03
      • Unrelated Business Income (UBI) 00:00:08, 00:03:06, 00:09:11, 00:12:54, 00:18:12, 00:27:06, 00:37:53, 00:57:53, 00:59:51, 01:18:28

      Capital Gain: Capital gain is an economic concept defined as the profit earned on the sale of an asset that has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares.

      Cost Of Goods Sold (COGS): The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example this may include the cost of the raw materials (parts) and the amount of employee labor used in production.

      Dividends: A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders.

      Exempt : Exempt employee is a term that refers to a category of employees set out in the Fair Labor Standards Act. They do not receive overtime pay, nor do they qualify for the minimum wage

      Expense: Offset (an item of expenditure) as an expense against taxable income.

      Form 990-T: Exempt organizations use Form 990-T to report unrelated business income. An exempt organization that has $1,000 or more gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return. The obligation to file Form 990-T is in addition to the obligation to file the annual information return.

      IRC Section 511 : 26 U.S. Code § 511 - Imposition of tax on unrelated business income of charitable, etc., organizations. There is hereby imposed for each taxable year on the unrelated business taxable income (as defined in section 512) of every organization described in paragraph (2) a tax computed as provided in section 11.

      IRC Section 512: IRC section 512 defines unrelated business taxable income as gross income generated by a trade or business regularly carried on by a tax-exempt organization that is not substantially related to the organization's tax-exempt purpose, less deductions directly connected with conducting the trade or business.

      IRC Section 513: IRC 513(a) defines the term "unrelated trade or business" as any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its exempt purpose or function.

      IRC Section 514: IRC Section 514 expands unrelated business income to include unrelated debt-financed income from investment property in proportion to the debt acquired in purchasing it. Property purchased with borrowed money (acquisition indebtedness) and held to produce investment income is referred to as debt-financed property.

      Liability: In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

      Net Operating Loss (NOL): Generally, a net operating loss (NOL) is an excess of deductions (for expenses from the operation of a business) over income from the operation of a business. For individuals, an NOL may also be attributable to casualty losses.

      Nonprofit Corporation: A nonprofit organization, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is an organization dedicated to furthering a particular social cause or advocating for a shared point of view.

      Revenue: In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover. Some companies receive revenue from interest, royalties, or other fees.

      Schedule A: Schedule A (Form 990) is used by an organization that files Form 990, Return of Organization Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, to provide the required information about public charity status and public support.

      Tax Cuts and Jobs Act: The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub.L. 115–97, is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs Act, that amended the Internal Revenue Code of 1986.

      Unrelated Business Income (UBI): For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization's exemption

      Unrelated Business Income Tax (UBIT) : 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 U.S.C. 501 organization that is not related to the tax-exempt purpose of that organization.

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      Frequently Asked Questions

      Unrelated Business Income Tax (UBIT) is a federal income tax imposed on tax-exempt organizations—including §501(c)(3) charities, associations, and other exempt entities—when they generate income from activities that are not substantially related to their exempt purpose. The existence of UBIT reflects Congress's intent to prevent exempt organizations from competing unfairly with taxable for-profit businesses in commercial activities simply because they hold a tax-exempt status. UBIT applies when income satisfies a three-part test under IRC Section 513: the income must be from a trade or business, that trade or business must be regularly carried on, and it must not be substantially related to the organization's exempt purpose. All three elements must be present for income to be subject to UBIT. Even a single unrelated business activity generating $1,000 or more in gross income triggers a Form 990-T filing obligation. UBIT rates are the same as the corporate tax rates applicable to taxable entities. The tax rules governing UBI are complex, with numerous exceptions and exclusions that can remove otherwise qualifying income from UBIT—including passive income such as dividends, interest, royalties, and certain rental income. Lori Borek, CPA and former 34-year IRS career veteran, guides nonprofit professionals through these rules in Aurora Training Advantage's on-demand Form 990-T webinar.
      The IRC provides significant exceptions and exclusions from UBIT that can protect substantial categories of exempt organization income from taxation, and understanding these provisions is essential for accurate UBI reporting and tax minimization. Passive investment income is the most broadly applicable exclusion: dividends, interest, annuities, royalties, and capital gains from the sale of non-inventory property are generally excluded from UBIT, reflecting the principle that purely passive returns on investment are not competitive threats to for-profit businesses. Rental income from real property is excluded unless the property is acquired with debt financing, in which case IRC Section 514's debt-financed property rules apply. Activities conducted by volunteers—where substantially all the work is performed without compensation—are excluded from UBIT. Convenience activities—businesses conducted primarily for the convenience of the organization's members, students, patients, officers, or employees—are excluded. Certain low-cost article distributions and exchanges of membership lists between organizations are also excluded. Importantly, some exclusions have exceptions that can claw back the exclusion: rental income loses its exclusion when personal property is rented along with real property in excess of a defined threshold, or when services beyond those customarily furnished with the real property are provided. Awareness of these nuances prevents both over-reporting of UBIT (paying tax that isn't owed) and under-reporting (missing taxable activities). Aurora Training Advantage's UBIT webinar with Lori Borek, CPA, covers exceptions and exclusions in practical detail.
      The Tax Cuts and Jobs Act of 2017 introduced a significant change to how exempt organizations with multiple unrelated business activities must report their UBIT: the silo rules require each separate unrelated trade or business to be reported independently on Schedule A of Form 990-T, with income and expenses tracked separately by activity rather than aggregated. Before the silo rules, an exempt organization could net losses from one unrelated business activity against income from another when computing total UBIT liability. Under the silo rules, a net operating loss from one unrelated trade or business activity cannot offset income from a different unrelated trade or business—each silo stands alone. This change significantly increases UBIT liability for organizations with multiple unrelated activities where some generate losses. The IRS uses a NAICS (North American Industry Classification System) code system to delineate separate trades or businesses: each distinct NAICS code represents a separate silo for reporting purposes. Organizations must carefully analyze their unrelated activities to determine how many separate silos exist and maintain separate income and expense tracking by activity throughout the year. Net operating losses generated under the pre-TCJA rules are governed by transition rules that differ from post-TCJA NOLs. Aurora Training Advantage's Form 990-T webinar with Lori Borek, CPA, provides step-by-step instruction on applying the silo rules and completing Schedule A correctly.
      Nonprofits subject to UBIT can reduce their taxable income by deducting expenses that are directly connected to the conduct of the unrelated trade or business, and understanding which expenses qualify is essential for minimizing tax liability while maintaining accurate records that support the deductions claimed. Direct expenses—costs incurred solely in connection with the unrelated business activity—are clearly deductible and include items such as cost of goods sold for merchandise sold in an unrelated retail operation, wages of employees who work exclusively on the unrelated activity, and supplies and materials used only in the unrelated business. Dual-use expenses—costs that benefit both the exempt purpose activities and the unrelated business—must be allocated between the two uses on a reasonable basis, with only the portion allocable to the unrelated business being deductible. Common dual-use items include facility costs, administrative overhead, and shared personnel. Depreciation on assets used in the unrelated business, interest on debt used to finance the unrelated business, and certain state and local taxes related to the unrelated activity are also deductible. Organizations must maintain detailed records that demonstrate the connection between claimed deductions and the unrelated business to withstand IRS scrutiny. Net operating losses from prior years can be carried forward and applied against future UBIT within the same silo under post-TCJA rules. Aurora Training Advantage's UBIT and Form 990-T webinar with Lori Borek, CPA, covers expense allocation and deduction strategies for nonprofit organizations navigating UBIT compliance.
      Form 990-T is the Exempt Organization Business Income Tax Return required to be filed by any tax-exempt organization that has $1,000 or more of gross income from an unrelated trade or business during the tax year, and completing it accurately requires a systematic approach to gathering data, applying the silo rules, and working through the form's multi-part structure. Preparation begins with gathering documentation for all unrelated business activities: gross revenue records, supporting expense documentation with direct-connection analysis, depreciation schedules for business-use assets, and prior year NOL carryforward schedules. Schedule A of Form 990-T must be completed for each separate unrelated trade or business—each NAICS code silo—reporting gross income, deductions, and net taxable income or loss for that activity independently. Part I of Schedule A captures unrelated trade or business income by category, while Part II covers deductions not taken elsewhere. The results from all Schedule A computations flow to Form 990-T itself, which aggregates Schedule A net income figures (but not losses across silos), computes the tax, and addresses installment payment requirements for organizations with substantial expected UBIT liability. Form 990-T is due by the 15th day of the fifth month after the organization's fiscal year end, with an automatic six-month extension available. Penalties for failure to file or underpayment of UBIT can be significant. Aurora Training Advantage's Form 990-T webinar with Lori Borek, CPA and former IRS career professional, provides step-by-step completion guidance with worked examples.