While most non-profits do enjoy tax exempt status, it is important to note that the IRS can tax certain portions of the organization's income through the Unrelated Business Income Tax Act (UBIT). Under UBIT, the IRS will sever, or separate, a portion of an organization's business and tax the income from that portion if the IRS determines that the income comes from activities that do not further the organization's tax exempt purpose.
What Is the UBIT test?
Under UBIT, a non-profit is liable to pay taxes if it is "engaged in a trade or business," which is "regularly carried on" and is "unrelated" to its purpose or mission as a non-profit organization. The definitions of these various elements are highly technical, and are constantly battled over in the courts.
What Are Common Examples of UBIT?
One form of activity the IRS has repeatedly found to be UBIT is advertising. Many non-profits have journals or other publications from which they derive income in the form of advertising revenue. The IRS often considers this income unrelated to the non-profit's purpose.
Another activity that the IRIS may consider UBIT is the exchange of mailing lists for money in the form of licensing arrangements. If a non-profit actively markets its mailing lists to other businesses the IRS may consider such activity unrelated to the non-profit's purpose.
How Can a Lawyer Help Me with My UBIT Problem?
If you are unsure whether your non-profit organization is generating income subject to taxation under UBIT, you should contact a tax attorney. A tax lawyer can help you determine your exact tax liability and help you with any conflicts that may arise.