UBIT (Unrelated Business Income Tax)

Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization's exemption. An exempt organization that has $1,000 or more or gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if it expects its tax for the year to be $500 or more.

The obligations to file Form 990-T is in addition to the obligation to file the annual information return, Form 990, 990-EZ or 990-PF. Each organization must file a separate Form 990-T, except title holding corporations and organizations receiving their earnings that file a consolidated return under Internal Revenue Code section 1501.

For more information on unrelated business income tax, see Publication 598, Tax on Unrelated Business Income for Exempt Organizations.

See Unrelated Business Tax Exceptions and Exclusions for a description of exceptions and exclusions from the unrelated business income tax applicable to tax-exempt organizations.

UBIT in an IRA

There is a commonly repeated view on Internet discussion groups, that "If your IRA invests in things that produce Unrelated Business Income (UBI), and the net income from these investments exceeds $1,000, your IRA could be subject to the Unrelated Business Income Tax (UBIT)". This is possibly a myth. The 2006 Tax Information packet for Hugoton Royalty Trust states, in page 9, "In the opinion of the trust's tax counsel, Winstead Sechrest & Minick P.C., the income of the trust will not be unrelated business taxable income so long as the trust units are not 'debt-financed property' within the meaning of section 514(b). In general, a trust unit would be debt-financed if the trust unitholder incurs debt to acquire a trust unit [...]".

However, the IRS does unequivocally state in the first few paragraphs of Chapter 1 of the November 2007 revision of Publication 598 that IRAs are "subject to the tax on unrelated business income."

Please check with your CPA or Tax Professional for additional information.

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