What is Form 990-T? Everything Nonprofits Need to Know About Unrelated Business Income Tax Reporting

Estimated reading time: 33 minute(s)

As a tax-exempt organization, you don’t pay federal income tax on the revenue that comes from carrying out your exempt purposes. That changes when your organization starts earning money from activities that have nothing to do with your mission.

That’s where unrelated business income comes in. If your organization runs a business-like activity on a regular basis, and that activity isn’t substantially related to your exempt purposes, the income may be taxable. Renting out office space, selling advertising in a newsletter, or operating a coffee shop that isn’t tied to your programs can all raise the question.

Owing tax on unrelated business income isn’t a compliance failure, and it doesn’t put your exempt status at risk on its own. It’s a normal part of running a nonprofit that has diversified its revenue. What matters is identifying the income correctly, reporting it on Form 990-T, and filing on time.

This guide covers the terminology, the test the IRS uses, the exceptions most organizations qualify for, the debt-financing rule that pulls income back into the taxable column, and the filing mechanics for Form 990-T.

UBI, UBTI, UBIT, and UDFI: What Each Acronym Means

Four acronyms come up constantly in this area, and they get used interchangeably even though they mean different things. Getting them straight makes the rest of the rules easier to follow.

One more term worth defining: an unrelated trade or business is any business or activity that meets all three parts of the test below.

Organizations taxed as corporations pay UBIT at the flat 21% corporate rate. Trusts, including IRAs, are taxed using the trust rate schedule instead.

The Three-Prong Test for Unrelated Business Income

For income to count as UBI, all three of the following must be true:

1. It’s a trade or business. The activity involves selling goods or services to generate revenue. If you’re offering services at a discounted rate or if you’re taking a loss on them, they typically aren’t considered a trade or business.
2. It’s regularly carried on. The activity happens frequently or continuously, in a way that resembles how a commercial business would operate.
3. It doesn’t actually further exempt purposes. The activity doesn’t contribute importantly to the charitable, educational, religious, or other mission your organization received exemption for. It must be specific.

If any one of the three isn’t true, the income isn’t UBI. All three prongs have to be satisfied together, which is why plenty of revenue that looks commercial at first glance ends up untaxed.

There’s also a second layer. Some activities meet all three prongs and still aren’t treated as UBI because the Internal Revenue Code carves out a specific exception. Certain investment income is the clearest example.

Common Exceptions to Unrelated Business Income

These are the exceptions organizations run into most often:

• Passive investments. Interest, dividends, capital gains, royalties, options, securities, and real estate rents are generally treated as passive investment income rather than UBI.
• Volunteer labor. If a substantial portion (85%) of the work is performed without compensation, the activity is generally excluded.
• Convenience of members. For 501(c)(3) organizations, a trade or business carried on primarily for the convenience of members, students, patients, officers, or employees is excluded. A campus cafeteria is the classic example.
• Donated merchandise. Reselling goods that were substantially all donated is excluded, which is why thrift store revenue generally isn’t taxable.
• Qualified sponsorships. When a donor sponsors your organization with no expectation of benefit beyond acknowledgment of the gift, the payment isn’t UBI.
• Bingo: Certain bingo games are not unrelated trade or business.

Sponsorship or Advertising? The Distinction That Trips Nonprofits Up

The qualified sponsorship exception has a hard edge, and it’s worth understanding before your next event.

If a sponsor’s logo appears on an acknowledgment sign at your fundraiser, that’s a qualified sponsorship and the payment isn’t UBI. If the same sponsor asks you to play their jingle, run their commercial, or make a qualitative claim about their product, you’ve moved into advertising, and that payment may be taxable.

One more limit: periodicals such as magazines and newsletters are specifically excluded from the qualified sponsorship exception. Ad revenue in your printed or emailed newsletter gets analyzed as advertising income, not sponsorship. 

When an Exception Stops Applying: Debt-Financed Income

Here’s the rule that surprises the most organizations. If you use debt to finance an activity that would otherwise fall under an exception, the income gets pulled back into UBI.

Say your organization takes out a loan and uses it to buy an investment property. Rental income is normally excluded. Because debt financed the purchase, a portion of those rents becomes unrelated debt-financed income and is taxable. But, if a substantial portion (85%) of the property is used to fulfill the organization’s exempt purpose, the activity is generally still excluded. It can be quite complicated.

Three things to remember about UDFI:

• Only the debt-financed portion is taxable. If your organization has a $50,000 loan against a property with an average adjusted basis of $100,000, roughly 50 percent of the rental income is subject to UBI.
• The percentage is based on average debt. The debt-financed portion is calculated by averaging the outstanding debt across the year, not by using a single point-in-time balance.
• The three-prong test still applies. If UDFI exists, confirm the activity also meets the rest of the test before treating the income as taxable.

IRAs, Form 990-T, and Who Actually Files

An IRA is tax-exempt, but the investments inside it can still generate UBI. This comes up most often with UDFI, when an IRA uses a loan to buy an income-producing asset such as real estate or an interest in a partnership.

A few points that cause confusion:

• The trustee of the IRA is responsible for filing Form 990-T. In practice, individuals who self-direct their own IRA often handle the filing.
• Any tax due is paid from the IRA itself, not by the account owner personally. The payment comes from funds inside the account, or from selling an asset held in the account.
• The filing obligation belongs to the account, so it doesn’t show up on the owner’s personal return.

Who Has to File Form 990-T

If your organization files a return in the 990 series, including Form 990, Form 990-EZ, or Form 990-PF, and it earned $1,000 or more in gross unrelated business income during the tax year, the IRS requires Form 990-T. 

Form 990-T is where your organization does the following:

• Reports gross unrelated business income and the deductions connected to it
• Calculates and reports the unrelated business income tax owed
• Reports additional tax liabilities, such as the proxy tax on certain political and lobbying expenditures
• Claims refunds for taxes paid by certain investment funds, including RICs and REITs, on undistributed long-term capital gains
• Requests credits for federal excise taxes or the small employer health insurance premium credit

Two thresholds are easy to miss. Organizations expecting $500 or more in UBIT for the year generally have to make quarterly estimated tax payments. And every organization gets a specific deduction of $1,000 against the sum of their UBTI before the tax applies. 

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. It’s where your organization reports gross income from an unrelated activity, subtracts the expenses directly connected to it, and arrives at the taxable amount. For a step-by-step walkthrough, see our 990-T Schedule A blog.

Schedule A lets you do the following:

• Claim deductions for expenses tied to the unrelated business activity, such as the utilities, staffing, and maintenance costs of a rental space
• Report income that qualifies for an exception and isn’t subject to UBIT
• Report UBIT on reinsurance entities, if that applies to your organization

The part that catches filers off guard is what separate reporting does to the math. Losses from one activity can’t offset income from another. If your organization runs a rental operation at a loss and sells advertising at a profit, the advertising income is still taxable.

How Business Codes Work

Business codes are the six-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 Form 990-T Is Due

The deadline depends on what kind of entity is filing.

Employees’ Trusts, IRAs, and Similar Accounts

For employees’ trusts defined under Section 401(a), IRAs, SEPs, SIMPLEs, Roth IRAs, Coverdell education savings accounts, and Archer medical savings accounts, Form 990-T is due by the 15th day of the fourth month after the end of the tax year. For calendar-year filers, that’s April 15.

All Other Organizations

Every other filer, including most 501(c)(3) organizations and private foundations, has until the 15th day of the fifth month after the end of the tax year. For calendar-year filers, that’s May 15. 

If your organization operates on a fiscal year, count forward from the end of your fiscal year rather than from December.

How to Request an Extension for Form 990-T

If your organization needs more time, file Form 8868, Application for Extension of Time To File an Exempt Organization Return, before the original due date. That gives you an additional six months to file without a late filing penalty. You must file a separate 8868 extension for your 990-T if you already filed one for your main 990 series form.

An extension applies to the return, not to the payment. Any tax owed is still due on the original deadline, so estimate what you owe and pay it with the extension request to avoid the late payment penalty.

Where to Get Answers on UBI

If you’re working through a specific question, these IRS resources go deeper than any summary can:

• Do we need to file Form 990-T? Publication 598, Chapter 1 covers which organizations are subject to the filing requirement, and Chapter 2 covers the requirements themselves.
• Is there an exception for this income? The IRS page on exclusions from unrelated business income lists them.
• Does this activity even count? The IRS explanation of the three-prong test walks through each prong.
• Do we file for an IRA? Publication 598, Chapter 1.
• We need examples. The IRS offers a training module on unrelated business income, with a transcript available for anyone who’d rather read than watch.
• We used a loan to buy this investment. The IRS page on debt-financed income explains how the taxable portion gets calculated.

For anything involving your organization’s specific facts, work with a CPA or tax professional who handles exempt organizations.

E-file Form 990-T With Tax990

Form 990-T is one of the more technical returns in the 990 series. The reporting depends on how the income was earned, whether an exception applies, how much debt was involved, and how many separate activities you’re accounting for.

Tax990 supports Form 990-T along with Schedule A and the other schedules your organization needs, using a guided workflow that walks through unrelated business income step by step. Every return includes the Tax990 Commitment, which means IRS acceptance or your money back, free amendments and retransmissions if something needs correcting, and Form 8868 extension filing at no additional cost. 

Every return also includes Protection Plus automatically, at no extra cost. If the IRS follows up on your return, you get up to $1 million in professional services for up to 3 years after acceptance.

Start Filing Form 990-T

Already have an account? Sign In to Continue Your Return