Unrelated Business Income Tax (UBIT): What Nonprofits Need to Know

This is where Unrelated Business Income Tax (UBIT) comes in. At its core, UBIT applies when a tax-exempt organization earns income from activities not substantially related to its exempt purpose. If your organization generates $1,000 or more in gross income from such activities during the tax year, you’re required to file Form 990-T and pay tax on that income.

UBIT is not meant to penalize nonprofit organizations. Instead, it ensures that tax-exempt entities don’t gain an unfair advantage when engaging in income-producing activities that compete with for-profit businesses.

However, determining what is and isn’t “unrelated” can be nuanced. The IRS uses a three-part test, and all three criteria must be met for income to be considered unrelated, and therefore taxable.

1. Is the activity a trade or business?

A trade or business is defined as any activity carried on to produce income from selling goods or providing services.

A helpful way to think about this is: Could a for-profit business perform this same activity?

Examples:

• Yes, it’s a trade or business: A coffee shop operating inside a church. Coffee shops are commonly run by for-profit entities, so this activity falls into that category.
• Possibly not a trade or business: Occasional fundraising events that are not structured like ongoing commercial activities.

If the answer is yes, move on to the second test.

2. Is the activity regularly carried on?

Frequency and continuity matter. The IRS compares the nonprofit’s activity to how often and how consistently a similar for-profit activity occurs.

Examples:

• Regularly carried on: A coffee shop running year-round inside a nonprofit.
• Not regularly carried on (and likely considered fundraising):
  • An annual gala
  • A once-per-year golf tournament

These occasional events don’t rise to the level of ongoing commercial activity and therefore typically fall outside UBIT.

3. Is the activity not substantially related to the organization’s exempt purpose?

The final, and often most subjective factor, evaluates whether the income-producing activity directly supports the nonprofit’s mission.

Examples:

• Likely not subject to UBIT:
  A nonprofit rents building space to another organization with a similar mission or exempt purpose.
• Likely subject to UBIT:
  The same nonprofit rents space to businesses or groups that do not share or advance its mission.

If the income does not meaningfully contribute to your organization’s exempt purpose, it may be taxable.

Misclassifying unrelated business income can lead to:

• IRS penalties
• Back taxes
• Reputational risk
• Lost tax-exempt status in extreme cases

Many nonprofits don’t discover an issue until they’re already required to file a Form 990-T, or worse, after an IRS inquiry. Identifying UBIT early helps organizations plan proactively, budget appropriately, and avoid unwelcome surprises.

At Froehling Anderson, we understand that nonprofit organizations face unique financial challenges—and UBIT can be one of the most confusing.

Our team of advisors works with mission-driven organizations to provide clarity, proactively plan, and offer year-round support.

Our approach includes:

• UBIT risk assessments to identify income streams that may require reporting
• Guidance on structuring activities to minimize UBIT exposure
• Support preparing and filing Form 990-T
• Review of rental agreements, partnership income, retail operations, and sponsored activities
• Education for boards and leadership teams to strengthen internal decision-making

We bring a balance of practical insight and technical expertise; something our clients value when navigating evolving IRS expectations.

Your mission matters and managing UBIT shouldn’t distract from it. Whether you’re evaluating new revenue opportunities or reviewing an existing activity, partnering with experienced professionals can help you stay compliant and confident.

As a trusted advisor to nonprofit organizations across Minnesota, Froehling Anderson is here to help you make informed decisions, reduce risk, and better understand how UBIT may impact your operations.

If your organization has questions about UBIT, Form 990-T filing requirements, or how to evaluate income-producing activities, our Minneapolis and St. Cloud, Minnesota based team of professionals is ready to help.

Connect with us today to start the conversation, and ensure your nonprofit continues to thrive while staying compliant.

Disclaimer: The information provided here is accurate at the time of publication but may change as laws and regulations evolve. While Froehling Anderson aims to share accurate, timely information, we encourage you to reach out to your relationship manager for guidance on your specific situation.