Not Everything Is Exempt: What Nonprofits Get Wrong About Unrelated Business Income
Estimated reading time: 11 minute(s)
Plenty of nonprofit leaders assume that tax-exempt status covers everything the organization earns. It doesn’t. When your nonprofit makes money from activities that have nothing to do with its mission, the IRS treats that income differently, and you may owe tax on it.
That’s where Form 990-T comes in. It’s the return that reports unrelated business income (UBI) and calculates the tax due on it. Getting it wrong can mean penalties or a compliance headache down the road, so it’s worth understanding before you file.
What Counts as Unrelated Business Income?
This is the piece organizations get wrong most often. Income is “unrelated” when it comes from a trade or business that’s regularly carried on and isn’t substantially related to your exempt purpose. A museum gift shop selling art books tied to its mission is one thing. That same shop selling unrelated merchandise, or the organization renting out equipment for profit, can be another.
The label doesn’t depend on how you use the money. Even if every dollar goes back into your programs, income from an unrelated business is still unrelated business income in the eyes of the IRS.
Who Needs to File Form 990-T?
If your organization reports $1,000 or more in gross unrelated business income, you have to file Form 990-T. That threshold is lower than most people expect, which is why so many organizations are surprised to learn they need to file at all.
It isn’t only traditional nonprofits, either. Disregarded entities and certain domestic or foreign organizations exempt under specific IRS code sections may need to file if they received $1,000 or more of gross income from an unrelated business. The form also applies to entities like employees’ trusts, IRAs, Roth IRAs, and Coverdell ESAs that have UBI to report. If your organization falls into this group, e-filing Form 990-T is the step that keeps you compliant.
What You Need Before You File
Form 990-T takes some preparation. Have this information ready before you start:
- Your organization’s name, address, and EIN.
- Details about your unrelated business income.
- Your full tax calculations.
- Information on tax dues and payments.
- Other activities of the organization.
- Your group exemption number, if you have one.
What Is Schedule A on Form 990-T?
When you e-file Form 990-T, you’ll fill out Schedule A to report each unrelated trade or business. The rule that confuses filers: every distinct trade or business needs its own Schedule A. If you have multiple income items under the same business code, you can combine them under a single Schedule A.
The point of Schedule A is to show a clean breakdown of income and allowable deductions for each separate unrelated business. For a step-by-step walkthrough, see the Form 990-T filing instructions.
How Business Codes Work
Business codes are the 6-digit numbers that categorize each type of unrelated business or trade. The IRS instructions include a full list of code categories, and on Schedule A you enter the code that best describes the activity you’re reporting. If you’re reporting more than one category, use a separate Schedule A for each so your codes stay accurate.
When Is Form 990-T Due?
For organizations filing Form 990-T alongside their 990 series return, the deadline is the 15th day of the 5th month after the end of the tax year. Employees’ trusts, IRAs, Roth IRAs, and Coverdell ESAs have a different deadline: the 15th day of the 4th month after the end of their tax period.
Missing the deadline can lead to IRS penalties, so mark the date that applies to your organization and give yourself time to gather everything.
File Form 990-T With Tax990
Unrelated business income doesn’t have to be complicated. Tax990 walks you through Form 990-T and Schedule A, checks your return against IRS business rules before you submit, and helps you file on time.
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Questions about your filing? Reach the Tax990 support team and we’ll help you sort it out.
