What is Unrelated Business Income Tax?

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Sometimes a homeschool group brings in a lot of money from fund raising. These efforts are so successful you may wonder if your group owes anything to the government in taxes. For the most part, fund raising is not considered part of your group’s mission; it is just a means to the end. After all, your group’s mission is to encourage homeschooling, not to sell ads, pizza or other products.

The Internal Revenue Service calls the money you raise “Unrelated Business Income,” meaning it is money collected in a trade or business that is not related to your primary mission. The IRS assess a tax on unrelated business income called the Unrelated Business Income Tax or UBIT. The purpose of this tax is to prevent nonprofit, tax-exempt organizations from having an unfair advantage over the for-profit marketplace.

The best example of unrelated business income is a gift shop in a nonprofit hospital. The income from a gift shop is not related to the hospital’s primary purpose of giving medical treatment, so the profits from the gift shop are taxed.

Your homeschool organization could have unrelated business income if you sell T-shirts, candy bars, entertainment books, candles, pizza coupons and a host of other products or if you make money from ads or Amazon commissions on your website.

Fortunately, the IRS has several exceptions to paying the UBIT tax:

  • A $1,000 threshold allows that the first $1,000 in profit from an unrelated business will not be taxed.
  • If the fundraiser (or unrelated business) is run by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.
  • If the fundraiser is not regularly carried on, such as a once-a-year spaghetti supper, then the proceeds are not subject to UBIT.
  • If you are selling donated items, like in a garage sale, the income raised is not taxed.

One of these exceptions are bound to apply to most homeschool organizations.

The rules regarding UBIT are complex. You can read more about UBIT in IRS Publication 598 Tax on Unrelated Business Income of Exempt Organizations (http://www.irs.gov/pub/irs-pdf/p598.pdf).

Carol Topp, CPA

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