Q: Unrelated Business Income - Can the org sell stuff and make money?
There is a thing called “Unrelated Business Income Tax” or “UBI.” For any funds obtained under UBI, you will most likely be required to pay income tax. UBI is a tax placed on funding/monies received that are not generated by conducting an activity that generates revenue, which is not is directly related to an organization’s mission.
For example, in the simplest form, if your organization owns a parking lot, and it rents out the lot to a business so they have a place for their customers to park, that income is not related to your stated purposes. So those funds would be considered UBI, and you (the organization) would have to pay income on those funds. Even if you use that money to fund your programs – it is unrelated to your activities and you’ll need to report it at the end of the year.
According to the IRS, "For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:
It is a trade or business, It is regularly carried on, and It is not substantially related to furthering the exempt purpose of the organization.
There are, however, a number of modifications, exclusions, and exceptions to the general definition of unrelated business income. Based on information from the IRS:
"The Internal Revenue Code contains a number of modifications, exclusions, and exceptions to unrelated business income. For example, dividends, interest, certain other investment income, royalties, certain rental income, certain income from research activities, and gains or losses from the disposition of property are excluded when computing unrelated business income. In addition, the following activities are specifically excluded from the definition of unrelated trade or business:
Volunteer Labor: Any trade or business is excluded in which substantially all the work is performed for the organization without compensation. Some fundraising activities, such as volunteer operated bake sales, may meet this exception.
Convenience of Members: Any trade or business is excluded that is carried on by an organization described in section 501(c)(3) or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this is a school cafeteria.
Selling Donated Merchandise: Any trade or business is excluded that consists of selling merchandise, substantially all of which the organization received as gifts or contributions. Many thrift shop operations of exempt organizations would meet this exception.
Bingo: Certain bingo games are not unrelated trade or business."
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