This is not intended to be tax advice, merely something to be aware of and discuss with your accountant or attorney. UBIT should be reviewed annually because this area is updated and revised by the IRS on an annual basis.
UBIT is a matter to aware of if your church, including its programs are generating income for the church including its programs which may be considered business by the IRS (facility rental, youth fund-raisers, tours, corporate sponsorships, etc.). It is worth evaluating to ensure that the church’s tax-exempt status is not jeopardized. If the church is generating UBIT, then paying the tax is not a terrible thing, unless the income exceeds 15% of the church’s donation income (see comments below).
First, does the income that is potentially UBIT exceed $1,000? If not, then it doesn’t require IRS form 990T to be filed. If it is, then the church needs to ask whether the income is UBIT.
The UBIT test must answer “yes” to the following three questions:
- Is the income from a trade or business? ie. Sale of goods or services.
- Do you regularly engage in the trade or business? This includes something that might occur once per year, but every year (frequency and continuity). An annual pizza sale by the youth for camp scholarships might be an example.
- Are the trade or business activities unrelated to the tax-exempt organization’s purposes as stated in the church’s 501c3 application? The income must contribute importantly to accomplishing the organizations ‘s exempt purposes to be substantially related (from IRS Substantially related document, 3-Apr-2018).
There are a couple exceptions that may apply.
- If all the labor is provided by volunteers.
- If all merchandise sold has been donated.
- Other exceptions include Bingo and business for convenience such as a cafeteria.
Another concern that needs to be checked is the property insurance. Does your insurance policy cover the UBIT activity you are considering.
Of primary importance, are the funds being raised from the UBIT less than 15% of the total donation income for the church? Exceeding 15% may imperil the church’s tax-exempt status.
Again, this is not tax advice, merely informative information. Many nuances and each situation is different so it is important to check with the church’s tax accountant or attorney to ensure the church is in compliance and does not imperil the church’s tax-exempt status. If you don’t have someone, call the CSF office for some suggestions of resources other churches have used.