Learn how certain activities could affect your nonprofit’s tax status and how to manage them.

Think your 501(c)(3) status means zero tax obligations? Think again!

While your nonprofit enjoys many benefits,engaging in certain revenue-generating activities may subject you to Unrelated Business Income Tax (UBIT). Here’s what you need to know.

Understanding UBIT: UBIT applies to income from activities unrelated to your nonprofit's mission. Examples include:

• Advertising Revenue: From your website or periodicals.
• Merchandise Sales: Like selling T-shirts for fundraising.
• Rental Income: From leasing unused building space.
• Referral Fees: From job posting boards.
• Investments: In specific partnerships.

Why It Matters: The IRS scrutinizes not only how you spend your funds but also their sources. Accepting certain types of income can lead to tax liabilities and added administrative tasks.

Tips to Minimize UBIT:

1. Educational Sales: Add educational content to merchandise to avoid UBI.
2. Strategic Leasing: Rent to mission-aligned organizations and avoid providing additional services.
3. Smart Investments: Opt for non-UBI producing investments.
4. Sponsorships vs. Ads: Ensure sponsorships don’t include calls to action or comparative language.

Key IRS Changes: Since 2018, UBI activities must be reported separately, preventing losses from one activity from offsetting profits from another. This emphasizes the need for careful planning and accurate tracking.

Action Steps:

• Separate Tracking: Implement codes to track UBI activities in your accounting system.
• Accurate Filing: Ensure your tax filings include UBI activities, such as in Form 990-T and relevant state forms.

Conclusion:Proper management of UBIT is essential for your nonprofit's financial health and compliance. By being strategic, you can minimize tax burdens and stay focused on your mission.