The Internal Revenue Service (IRS) continues to focus on unrelated business activities during its audits of not-for-profit organizations. Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the organization’s exempt purpose, except that the organization uses the profits derived from this activity to subsidize operations.
In January 2014, the IRS released an updated version of Publication 598, “Tax on Unrelated Business Income of Exempt Organizations.” The publication is a must read for anyone looking for a straight-forward explanation of the unrelated business income tax rules, including the definition of an unrelated trade or business, how to properly allocate expenses, calculate the tax, and Form 990-T, Exempt Organization Business Income Tax filing requirements.
In addition to applying to most tax-exempt organizations, individual retirement accounts (IRAs), including traditional IRAs, Roth IRAs, Coverdell IRAs, Simplified Employee Pensions (SEP-IRAs), and Saving Incentive Match Plans for Employees (Simple IRAs), among others, are also subject to the tax on unrelated business income.
Exempt organizations subject to the tax on unrelated business income must file Form 990-T. Form 990-T is required if the organization’s gross income from unrelated business is $1,000 or more.
The Form 990-T of an employees’ trust, an IRA or MSA must be filed by the 15th day of the 4th month after ending its tax year. Form 990-T of all exempt organizations is due the 15th day of the 5th month after its tax year-end. The Form 990-T must be made available for public inspection.
Although the form is not eligible for electronic filing, federal tax deposits and payments must be made by electronic funds transfer. Estimated tax payments must be made if a tax-exempt organization expects its unrelated business income tax to be $500 or more.
Not-for-profit organizations should familiarize themselves with the unrelated business income tax rules, and Publication 598, www.irs.gov, is a great place to start.