Income-Producing Activities and Tax-Exempt Status

Before we move on to the next section, let’s talk about the impact UBI has on your organization’s exempt status.

With tightening budgets, many organizations are becoming creative in their types of income-producing activities. Most of these activities carry no risk to exempt status, nor do they create taxable income provided they further an exempt purpose or qualify for one of the exceptions.

Your 501(c)(3) can have some unrelated trade or business income without impacting its exempt status. Only when the income from unrelated trade or business becomes substantial in relation to exempt purposes is your exempt status jeopardized.

You should evaluate each of your organization’s income-producing activities to see if any meet the definition of UBI. If they do, determine if any exceptions or exclusions apply.

If an activity generates UBI, you do not have to discontinue it. You should, however, make sure you report and pay the tax. You should also ensure that UBI activities do not become substantial in relation to overall activities.