Churches and Nonprofit Unrelated Business Income 990-T

Churches and Faith-based organizations are supported primarily from either contributions or revenue from activities directly related to their exempt purposes. Some examples are exempt purposes for church-related income,

• Sales of Religious books,

• Tuition at School

• Campers' fees

All income of the tax-exempt organization is presumed to be exempt from federal income tax unless the income is generated by an activity that meets all of the following:

Not substantially related to the organization's exempt purpose or functions,

A trade of business, and

Regularly conducted

However, organizations may have to pay tax on income derived from activities unrelated to their exempt purpose. Form 990-T must be completed annually to report the source(s) of UBI and related expenses and to compute any tax. UBI amounts are also reportable on Form 990 filing of Form 990 is required) Organizations required to file a Form 990-T will generally also be required to make a state filing related to the UBI. Churches must file Form 990-T if they have $1,000 or more of gross UBI in a year.

Consequences

Some church and nonprofit leaders are paranoid about the UBI to the point that they feel it must be avoided altogether. The most common adverse result of having UBI is that all or part of it may be taxed. A less frequent, but still possible, the result is that the organization will lose its tax exemption. It is possible that the IRS will deny or revoke the tax-exempt revenue from unrelated activities.

A nonprofit with unused office space might rent the space to another organization. Also, nonprofits are expected to invest surplus funds to supplement the primary sources of the organization's income.