Nonprofits are exempt from income tax on income connected to their exempt purpose. They are not exempt from tax on income from a business they carry on regularly that has nothing to do with that purpose. That income is unrelated business taxable income (UBTI), and Form 990-T is where it is reported and the tax computed.
When you must file
An exempt organization must file Form 990-T if it has gross income of $1,000 or more from a regularly carried on unrelated trade or business. Gross income here means gross receipts minus the cost of goods sold, before other expenses. Organizations also file it to pay the proxy tax on lobbying expenses under section 6033(e) or to claim certain refunds and credits.
The 990-T is a separate return. It is filed in addition to whatever Form 990, 990-EZ or 990-N the organization files, and it applies even to organizations that are otherwise excused from the annual information return. That includes churches; see Form 990 for churches. The full 990 asks about it in Part V, and the 990-EZ asks on line 35a.
What makes income "unrelated"
Income is unrelated business income when all three of these are true:
- It comes from a trade or business, meaning an activity carried on to produce income from selling goods or services.
- The business is regularly carried on, with the frequency and continuity of comparable commercial businesses. A once-a-year event usually isn't.
- It is not substantially related to the exempt purpose. Needing the money for programs doesn't make it related; the activity itself must contribute importantly to the mission.
Several exceptions remove income even when the three tests are met: businesses run substantially by volunteers, businesses carried on mainly for the convenience of members, students, patients or employees, and sales of mostly donated goods. Many kinds of passive income are also excluded, including dividends, interest, royalties, most rents from real property and most capital gains, unless the property is debt-financed.
Common sources of unrelated business income
Whether a particular activity is unrelated depends on its facts. Activities that often need a closer look include:
- Selling advertising in a magazine, newsletter or event program
- A café, gift shop or online store selling items not connected to the mission
- Renting debt-financed property, or renting personal property such as equipment
- Income from partnerships or LLCs that run active businesses
- Services sold to the general public that aren't part of the exempt program
Our guide to unrelated business income examples walks through these case by case.
How the tax is computed
Each business is its own "silo." Since 2018, section 512(a)(6) requires an organization with more than one unrelated trade or business to compute income separately for each one, on a separate Schedule A (Form 990-T). A loss from one business can't offset income from another.
A $1,000 specific deduction is allowed against the total.
Rates. Unrelated business taxable income of an exempt corporation is taxed at the flat 21% corporate rate. Trusts pay tax at trust rates.
Estimated payments. If the organization expects its tax (after credits) to be $500 or more, it must make quarterly estimated tax payments, and underpayment penalties apply if it doesn't.
An arts center's street-front café. Assume, for this example, that the café mainly serves passersby and is an unrelated business. For the year:
- Sales: $85,000. Cost of food and drink sold: $34,000.
- Gross income: $85,000 − $34,000 = $51,000, well over $1,000, so a 990-T is required.
- Café wages $28,000 and a reasonable share of utilities and supplies $6,000 leave net income of $51,000 − $28,000 − $6,000 = $17,000.
- After the $1,000 specific deduction, UBTI is $16,000.
- Tax at 21%: $16,000 × 21% = $3,360.
Because the tax is over $500, the center should make quarterly estimated payments for the following year. If the café had instead lost money after wages, the center would still file, because the filing test looks at gross income, not profit.
Estimate your own tax with the calculator below.
Due dates
| Organization | Form 990-T due |
|---|---|
| Corporations and trusts other than those below | 15th day of the 5th month after year end |
| Employees' trusts under section 401(a), IRAs (including SEPs and SIMPLEs), Roth IRAs, Coverdell ESAs, Archer MSAs | 15th day of the 4th month after year end |
Weekend and holiday dates move to the next business day. Form 8868 gives an automatic six-month extension to file, but not to pay. Every organization filing a 990-T uses Form 8868 for its extension. See due dates and extensions.
Penalties
The 990-T is a tax return, so its penalties work differently from the daily penalty on the Form 990. A late return is charged 5% of the unpaid tax for each month or part of a month it is late, up to 25%. For a return more than 60 days late, the 2025 instructions set a minimum penalty of the smaller of the tax due or $525. Paying late adds a separate penalty of generally 0.5% of the unpaid tax per month, plus interest.
The café's 990-T, filed three months late with $3,360 unpaid. Three months at 5% is 15%, or $504. Because the return is more than 60 days late, the minimum applies, so the late-filing penalty is at least $525, before the late-payment penalty and interest.
E-filing and public disclosure
Organizations and trusts subject to the unrelated business income tax must e-file the 990-T; see e-filing requirements. A 501(c)(3) organization must also make its 990-T (including amended returns) available for public inspection for three years from the due date, including extensions, the same as its Form 990. See public disclosure.
Common mistakes
- Netting expenses before the $1,000 test. Only cost of goods sold comes off.
- Combining businesses so that a loss in one hides income in another.
- Allocating too much shared overhead to the unrelated activity without a reasonable method.
- Forgetting partnership income. A Schedule K-1 from an investment partnership can carry unrelated business income.
- Missing estimated payments in the year after the first 990-T.
Not every payment from a business is advertising. A qualified sponsorship payment, where the sponsor gets only an acknowledgment of its name or logo and no qualitative or comparative advertising, is generally not unrelated business income. The line between the two depends on the wording, so review sponsor packages before they are sold.
Frequently asked questions
Is all advertising income unrelated business income?
Not always. Whether income is unrelated depends on the facts: what was sold, how it was sold and how it connects to the exempt purpose. Sponsorship acknowledgments, for example, can be treated differently from paid advertising.
What does "gross income" mean for the $1,000 test?
Gross receipts from the unrelated business minus the cost of goods sold. It is measured before other deductions, so an activity can trigger the filing requirement even if it lost money.
Can we extend the 990-T?
Yes. File Form 8868 by the original due date for an automatic six-month extension. Any tax due must still be paid by the original due date.
Does unrelated business income threaten our exemption?
A modest amount doesn't. The concern arises when unrelated activity becomes substantial compared with exempt activity. Paying the tax on what you have is the expected treatment; if the business is growing, ask whether it belongs in a taxable subsidiary.
Do private foundations file the 990-T too?
Yes, if they have $1,000 or more of gross unrelated business income. That tax also reduces a foundation's distributable amount; see the private foundation payout guide.
Sources
- IRS: 2025 Instructions for Form 990-T. irs.gov
- IRS: Unrelated business income tax returns. irs.gov
- IRS: Return due dates for exempt organizations, Form 990-T (trusts). irs.gov
- IRS: Publication 598, Tax on Unrelated Business Income of Exempt Organizations. irs.gov
- IRS: Instructions for Form 8868. irs.gov
- IRS: 2025 Instructions for Form 990, Appendix D. irs.gov
IRS figures change; inflation-adjusted amounts are updated each year. We review this page when the IRS publishes new instructions.
990IRS.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.
