Filing your return for UBIT

Writing about the Neighborhood Land Rule last week reminded me of the importance of correctly handling unrelated business income tax (UBIT). I have written other blog entries on this topic, but want to cover filing the tax return, because it must be handled separately from the Form 990-T annual return, even though the due date is the same. The IRS actually wants the returns in separate envelopes.

Unrelated business income (UBI) is revenue that is not related to the organization’s mission, even if it helps support the organization.  UBI is ancillary revenue from an activity that is outside the purpose for which the organization is considered exempt.  Typical sources of UBI are advertising revenue, rental income, investment income, gaming income and sales of merchandise and publications, to name a few.

If you believe your organization may have UBI, please consult your tax advisor.  Each type of UBI may or may not be taxable depending on the type of organization.  Additionally, there are certain exceptions that may exempt that revenue from taxation.

You must pay estimated taxes quarterly if the annual total tax due is expected to be $500 or more. Form 990-W is a worksheet that helps you determine how much to pay. Here are the organizations that must pay unrelated business income tax:

  • Organizations exempt from tax under section 501(a) of the Internal Revenue Code
  • Employees’ trusts forming part of pension, profit-sharing, and stock bonus plans
  • Individual retirement arrangements
  • State and municipal colleges and universities
  • Qualified state tuition programs
  • Medical savings accounts
  • Coverdell savings accounts

Unless the money is in a trust, unrelated business income is taxed at corporate rates.  For exempt trusts, any UBI is taxable at the regular trust tax rates.  However, exempt trusts are not allowed the personal exemption deduction that is normally allowed other trusts.

The due date for the UBIT return is different for corporations and trusts. The due dates for the 990-T are based on the end date for the tax year:

–         Due dates for tax exempt corporations

–         Due dates for tax exempt trusts

You can file up to a six-month extension with Form 8868.