The extended due date for calendar year 2022 Form 990-T filers is just around the corner: November 15, 2023. The unrelated business income tax (UBIT) is reported on Form 990-T (and Form CT-13 for NYS filers) if income is at least $1,000. With this due date approaching, organizations should be aware of what types of tax-exempt organizations are required to file if they have unrelated business income activity.
Unrelated Business Tax Under Internal Revenue Code (IRC) Section 511
The unrelated business tax under Internal Revenue Code (IRC) Section 511 is applicable to exempt organizations. Unrelated business taxable income (UBTI) is income from any unrelated trade or business of the organization that is regularly carried on and which isn’t substantially related to the organization’s exempt purpose. Certain activities and income are excluded from UBTI, for example, activities in which the work is performed by volunteers and qualified sponsorship payments.
It is a common misconception that UBIT only applies to public charities (IRC 501(c)(3) organizations) or to those organizations that file a Form 990. This is not the case.
In fact, the following organizations are subject to the tax on unrelated business income:
- Most exempt organizations under IRC 501(c)
- State and municipal colleges (including community colleges)
- A church or convention of churches
- Foreign organizations with tax-exempt status in the U.S.
- stock bonus, pension or profit-sharing plans (under IRC 401(a)
- Individual retirement accounts (IRAs), both traditional and Roth
- Simplified pension plans (SEP)
- Simple incentive match plan (SIMPLE)
- Coverdell education savings accounts
- Qualified tuition programs (529 plans)
- Qualified ABLE programs
- Health savings accounts (HSAs)
As illustrated above, many types of organizations are subject to UBIT, and those organizations must review their activity to determine if it applies. Even if the organization is not required to file a Form 990, such as a community college or church or if their gross receipts average under $50,000 annually, they may still have to file Form 990-T if they have unrelated business income activity.
In addition, many of the required entities listed above have a primary activity of investing, such as pensions, IRAs and 529 plans. These entities may invest in alternative investments which may generate UBIT. A thorough review of Schedule K-1s received by these entities should be performed as the UBIT will be reported to the organization on the Schedule K-1. Since these types of investments may report UBIT in one year and not in the next, or the exempt organization may buy and sell these investments, it is likely that the exempt organization may not be subject to the tax every year. This is another reason the organization must review the activity annually.
The Unrelated Business Tax Applies To Many Types Of Tax-Exempt Organizations
The unrelated business tax applies to many types of tax-exempt organizations. Those that are exempt under 501(c) are subject to UBIT and not only include public charities, but include social welfare organizations, civic leagues, social clubs, labor organizations and business leagues. In addition, many entities organized under IRC 401(a) are also subject to the tax. With the extended deadline of November 15th looming, it is crucial for these organizations to review their activity to determine if they need to file Form 990-T.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.