An exempt organization can engage in an activity(ies) that are not listed in section 501(c)(3) of the Internal Revenue Code. These activities are called “unrelated business activities” and income from these activities are not exempt from tax, and more importantly cannot be the primary activity of the organization.
An unrelated business activity is an activity that (i) is not substantially related to or does not significantly contribute to furthering the purpose for which exempt status was granted and (ii) is regularly carried on for the production of income. Regularly carried on means frequently and continuously engaging in the activity – an activity is considered to be regularly carried on if it is pursued in a manner similar to commercial activity of a for-profit entity.
Certain income received by a 501(c)(3) organization is not considered unrelated business income, such as:
- dividends, interest, and certain other investment income
- royalties
- certain rental income
- certain income from research activities
- gain/losses from the disposition of 501(c)(3) property
- activities that are substantially performed by volunteers such as fundraisers
- activities carried on for the convenience of members, students, patients, officers, or employees
- selling merchandise that an organization receives as a gift or contribution
- bingo – see Pub. 3079 Gaming Publication for Exempt Organizations
Income from unrelated business activities are reported on Form 990 and Form 990-T, Exempt Organization Income Tax Return if the income is $1,000 or more. Information needed to complete Form 990-T includes –
- Part I, Unrelated Trade or Business Income
- Part II, Deductions Not Taken Elsewhere
- Part III, Total Unrelated Business Taxable Income
- Part IV, Tax Computation
- Part V, Tax and Payments
- Part VI, Statements Regarding Certain Activities and Other Information
For additional information on unrelated business activities See Pub. 598, Tax on Unrelated Business Income of Exempt Organizations.