Taxation on Unrelated Business Income for Non-profit Organizations

Taxation on Unrelated Business Income for Non-profit Organizations

Non-profit organizations generally operate for charitable or other beneficial purposes, most income that they receive is exempt from tax under the Internal Revenue Code. However, when tax-exempt non-profits earn income through an activity that is unrelated to their exempt purposes (such as activity that is commercial in nature, like sales of goods) and the activity is “regularly carried on,” the revenue from the activity may be taxable income under IRS rules for “unrelated business income taxation”.

Generally, an exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T to IRS. Form 990-T requires the organization to disclose unrelated trade or business income, deductions directly connected with the unrelated business trade or income. An organization with more than one unrelated trade or business should attach separate schedules for each additional trade or business to disclose the necessary information. And if your estimated tax is expected to be $500 or more, your organization filing Form 990-T must make instalment payments of estimated tax.

For most exempt organizations, Form 990-T is due annually by the 15th day of the 5th month after the end of its tax year, although there are exceptions, such as an employee’s trust defined in section 401(a) is due by the 15th day of the 4th month after the end of its tax year. Filers may request an automatic extension of time to file Form 990-T by using Form 8868.

Please note that if you fail to file Form 990-T, your organization may be subject to interest and penalty charges if it files a late return or fails to pay tax when due. Generally, the organization isn’t required to include interest and penalty charges on Form 990-T because the IRS can figure the amount and bill the organization for it.