B J Kang Law PC
  • HOME
  • PEOPLE
  • SERVICES
    • KIC SV Sample Documents
  • CONTACT
  • PERSPECTIVES
  • Careers

Our Perspectives

Unrelated Business Tax & Form 990-T

7/19/2013

0 Comments

 
Last week, I gave a theoretical account of a small business owner that was run out of business by a local non-profit.

Fortunately, this is not a real story. To alleviate this potentially unfair competition issue, the Internal Revenue Code makes an exempt organization like the EDL, subject to federal tax at a corporate level to the extent that their income is generated from a business unrelated to their mission. This is commonly called, “Unrelated Business Income.” The Unrelated Business Income has to be reported separately in the Form 990-T.

Unrelated business income is usually found when there is a trade or business activity that is carried on regularly, but is not substantially related to the exempt purpose of the organization.[1] In our theoretical EDL case, the sandwich sale was clearly a business activity, as it involves a sale of product. Furthermore, these sales were made every day. Since the mission of the EDL was to feed people in need, these sales cannot be substantially related to the EDL’s exempt purpose. Therefore, EDL will have to report their sandwich sales separately in 990-T and pay taxes on that income.

In a previous article, I briefly introduced a specific rule about how a membership organization has to calculate their income from journal sales when there are two different price tags for member sales and non-member sales. In fact, this rule was just the tip of the iceberg of a  very complicated calculation process of UBIT income and expenses for a membership organization. We will go over more specific rules for the UBIT calculation later by type of organization. However, let me now put in a very broad context, the UBIT in Form 990-T . Generally, Unrelated Business Income is taxable after deducting directly connected expenses, and the tax is called UBIT (“Unrelated Business Income Tax”).[2]

[1] See Internal Revenue Code Section 513(a) for definition of UBIT.

[2] See Treas. Reg. 1.512(a)–1(a) to find the meaning of “directly connected.”

0 Comments

Your comment will be posted after it is approved.


Leave a Reply.

    Categories

    All
    Business Immigration
    Business Planning And Corporate Transactions
    Federal And State Tax Planning
    International Tax


    Authors


    ​B.J. Kang JD, CPA
    Josh Portman JD, LL.M
    Habeeb Syed JD
    Nora Ji Li LL.M
    Nathaniel S. Johnson

    Archives

    December 2022
    February 2021
    January 2021
    November 2020
    March 2020
    April 2019
    April 2018
    February 2018
    January 2018
    October 2017
    September 2017
    July 2017
    January 2017
    October 2016
    September 2016
    January 2016
    December 2015
    October 2015
    June 2015
    March 2015
    January 2015
    November 2014
    October 2014
    September 2014
    August 2014
    July 2013



    DISCLAIMER:
    The information contained on this web-site is not legal advice. The information may not reflect the most up-to-date legal developments.  Unless otherwise indicated in writing, any US federal tax advice contained in this web-site is not intended to be used, and cannot be used to (i) avoid penalties under the US Internal Revenue Code, or (ii) promote, market or recommend to another party any matter addressed herein.

    RSS Feed

 
3135 Mount Vernon Ave., Alexandria, VA 22305 
3003 N. First St., San Jose, CA 95134 (CA Branch: KIC-SV)
Harvard Sq., 1 Mifflin Pl., STE 400, Cambridge, MA 02138 (MA Branch)
Telephone : 703-595-2836 Fax : 703-722-9168
Copyright © 2021 B.J. Kang Law, PC. All rights reserved.