Being tax-exempt covers income from your mission. It doesn't cover a side business. When an exempt organization regularly runs a business that has nothing to do with its purpose, the profit is unrelated business taxable income (UBTI), and the tax on it is the unrelated business income tax (UBIT). It is reported on Form 990-T, separately from your annual Form 990.
The three-part test
Income is unrelated business income only if all three of these are true.
- It comes from a trade or business. That generally means an activity carried on to produce income from selling goods or services, with an intent to make a profit.
- The business is regularly carried on. The IRS looks for frequency and continuity similar to comparable commercial businesses. Publication 598 gives the contrast: a hospital auxiliary's sandwich stand at a state fair for two weeks is not regular, but running a commercial parking lot every Saturday, year-round, is.
- It isn't substantially related to your exempt purpose. The activity must contribute importantly to the purpose itself, not just raise money for it. Using the profits for your mission doesn't make the activity related.
Scale matters too. If an activity is larger than needed to serve the exempt purpose, the excess can be unrelated.
Common examples
| Activity | Usual treatment | Why |
|---|---|---|
| Selling ads in your magazine or newsletter | Generally unrelated | Selling advertising is a trade or business even when the publication itself is related |
| Sponsor thank-you with name and logo only | Not taxable | A qualified sponsorship payment |
| Renting out equipment, tents or sound systems | Generally unrelated | Rents from personal property aren't excluded |
| Renting your building to a tenant | Generally excluded | Rents from real property are excluded, unless the property is debt-financed |
| Commercial parking lot open to the public | Generally unrelated | Parking space isn't excluded rent |
| Gift shop selling mission-related items | Related | The items further the exempt purpose |
| Gift shop selling general souvenirs | Can be unrelated | Each line of merchandise is judged separately |
| Thrift shop selling donated clothing | Excluded | Selling donated merchandise is excluded |
| Selling your mailing list to businesses | Generally unrelated | Doesn't serve the exempt purpose |
| Licensing your name or logo for a fee | Generally excluded | Payments for trademarks and names are ordinarily royalties |
Advertising versus sponsorship
This is the area organizations most often get wrong. A qualified sponsorship payment is a payment from a business that receives no substantial benefit other than the use or acknowledgment of its name, logo or product lines. That income isn't taxed. A logo on an event banner or a "thanks to our sponsor" line in a program qualifies.
It becomes advertising, which can be taxable, when the message includes qualitative or comparative language, price information, an endorsement, or an inducement to buy. "Proud sponsor: Main Street Bank" is an acknowledgment; "Main Street Bank: the best rates in town, open a free account today" is an ad. A payment also isn't a qualified sponsorship payment if it depends on attendance or ratings, or if it buys recognition in a regularly scheduled periodical such as a monthly magazine. Event programs aren't periodicals. If one payment buys both, only the part above the fair market value of the advertising is treated as sponsorship.
Royalties and affinity programs
Royalties are excluded. Payments for the use of trademarks, trade names or copyrights are ordinarily royalties, so licensing your name to a credit card or merchandise program can produce excluded income. The exclusion doesn't cover payments for personal services: if your organization actively markets or services the program, part of the income may not be a royalty. Royalties from a controlled subsidiary follow special rules.
Debt-financed property
Income from property bought with borrowed money (acquisition indebtedness) can be taxable even if the same income would otherwise be excluded, such as rent from a building. A proportion of the income, based on the debt, is included. Property is not treated as debt-financed if 85% or more of its use is substantially related to your exempt purpose.
What is excluded
Activities that aren't treated as unrelated businesses
- Volunteer labor: a business in which substantially all the work is done without pay, such as a store staffed by unpaid volunteers.
- Donated goods: selling merchandise substantially all of which was received as gifts, like a thrift shop.
- Convenience of members: for a 501(c)(3), a business run primarily for the convenience of its members, students, patients, officers or employees, such as a college laundry for students.
- Qualified sponsorships, qualified conventions and trade shows, and certain bingo games, each under its own conditions.
Passive income
Dividends, interest, annuities and similar investment income, royalties, and most rents from real property are excluded, along with certain gains on property sales. Some limits apply:
- Mixed leases: if more than 10% of the rent is for personal property (furniture, equipment), that portion is taxable; above 50%, none of the rent is excluded.
- Rent based on the tenant's net profit isn't excluded; rent based on a fixed percentage of gross receipts can be.
- Services: payments for space when services are also provided, such as hotel rooms or parking lots, aren't excluded rent.
- Debt-financed property and payments from controlled organizations follow special rules. Social clubs and certain benefit associations are taxed on investment income.
The silo rule
Since 2018, section 512(a)(6) requires an organization with more than one unrelated trade or business to compute UBTI separately for each one. Each business is identified by a two-digit NAICS industry code and reported on its own Schedule A (Form 990-T). A business's UBTI can't be less than zero, so a loss in one business can't offset profit in another. The losses are carried forward within the same business.
Deduction, filing threshold and tax
- $1,000 specific deduction. After adding up the separately computed businesses, you subtract one $1,000 specific deduction, regardless of how many businesses you run. (Certain dioceses and church conventions can claim one per local unit.)
- $1,000 filing threshold. You must file Form 990-T if gross income from regularly carried on unrelated businesses is $1,000 or more. Gross income is gross receipts minus cost of goods sold, so a business that lost money can still trigger filing.
- 21% rate. An exempt corporation multiplies its UBTI by 21%. Exempt trusts pay trust rates.
- Estimated tax. If the expected tax, after credits, is $500 or more, the organization must make quarterly estimated payments.
- Due date. Form 990-T is due the 15th day of the 5th month after year end for corporations, and must be e-filed. Form 8868 extends the time to file, not to pay.
A hypothetical community theater with $600,000 of revenue has two unrelated businesses. It sells ads in its quarterly magazine: $40,000 of ad revenue and $28,000 of direct costs, for $12,000 of income. It also rents its sound equipment to outside groups: $9,000 of rent and $11,500 of costs, a $2,500 loss.
Under the silo rule, each is computed separately. The magazine produces $12,000. The equipment rental's result can't go below zero, so it contributes $0, and its $2,500 loss is carried forward against future equipment-rental income.
UBTI is $12,000 + $0 − $1,000 specific deduction = $11,000. The tax is $11,000 × 21% = $2,310. If the two businesses could be combined, the tax would have been $1,785, so the silo rule costs this theater $525.
Because gross income from unrelated businesses is well over $1,000, it files Form 990-T. If it expects a similar result next year, the expected tax is over $500, so it should make quarterly estimated payments.
Keeping it under control
Keep separate records of the revenue and direct expenses of each activity. Review sponsorship agreements and ad copy before they are signed and published, not afterward. Report the activities on the 990 (Part V asks about unrelated business income) and check whether a state return is also required. Our UBIT estimator gives a quick first figure. Watch the gross receipts too: unrelated revenue counts toward the thresholds that decide which 990 you file.
Frequently asked questions
Does unrelated business income put our exemption at risk?
A modest amount of unrelated business income is common and is handled by paying the tax. If unrelated activity becomes a substantial part of what the organization does, it can raise questions about exempt status. That's a facts-and-circumstances question worth raising with an adviser.
We held one gala with sponsor ads in the program. Is that taxable?
A once-a-year event usually isn't "regularly carried on," and acknowledgments in an event program can be qualified sponsorships. Ads with prices, endorsements or calls to buy are advertising, so review the program copy.
Can we deduct overhead against unrelated income?
Expenses directly connected with the unrelated business are deductible, and shared expenses, such as staff time or space used for both exempt and unrelated activity, can be allocated on a reasonable basis. Keep the allocation method documented.
Do churches file Form 990-T?
Yes, if they have $1,000 or more of gross unrelated business income. The 990-T applies even to organizations that don't file a Form 990. See Form 990 for churches.
Sources
- IRS: Publication 598, Tax on Unrelated Business Income of Exempt Organizations. irs.gov
- IRS: 2025 Instructions for Form 990-T. irs.gov
- IRS: Unrelated business income tax returns. irs.gov
- Cornell LII: 26 U.S. Code section 512. law.cornell.edu
- Cornell LII: 26 U.S. Code section 513. law.cornell.edu
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.
