Although the IRS strictly observes the income producing activities of nonprofits, they do make some exceptions. Unrelated business activities for nonprofits are subject to income tax if they are conducted regularly and are unrelated to the mission of the organization.
There are exemptions from the criteria the IRS has set to define UBIT. If an exemption applies to the nonprofit, they are no longer required to pay UBIT.
Nonprofit Exemptions From UBIT
The IRS defines certain types of activities as well as certain types of income as exemptions from the UBIT.
- If annual earned income is less than $1,000, it is tax-free. Even if the activities sold goods or services unrelated to its underlying purpose, the organization does not need to file a tax return for income under this threshold.
- If all the work for the service or products sold were done by volunteers, it is tax-exempt.
- If the products and services are mainly for the convenience of the group’s members or staff, it is tax-free.
- There is a tax exemption provided if the nonprofit sells donated merchandise.
- If the nonprofit uses bingo games for fundraisers, it is considered an exemption. However, bingo must be legal in the nonprofit’s area and not played in a hall that also hosts commercial bingo gaming.
- When the nonprofit displays a company’s name or logo in return for money, as long as it’s limited advertising, it is tax-exempt.
- Sometimes a nonprofit exchanges or rents its membership list to another nonprofits. This type of activity is not subject to UBIT.
- If the nonprofit uses entertainment to promote agriculture or education at a public event, this activity is also tax-exempt.
- Income from research grants or contracts.
- Gains and losses from selling property.
- Dividends, interest, annuities and other investment income.
- Earned royalties from copyrighted material etc..