Unrelated business income is income from a trade or business not substantially related to the performance of the organization, its exempt purpose, or function.
Even though an organization may be recognized as tax exempt, it may still be liable for tax on its unrelated business income. An exempt organization that has $1,000 or more in gross income from an unrelated business must file an Exempt Organization Business Income Tax Return (IRS Form 990-T (pdf)).
If you have any questions as to whether any activity creates unrelated business income tax, please contact the Corporate Tax Manager at CorporateTax@duke.edu
There are a number of modifications, exclusions, and exceptions to unrelated business income. For example, dividends, interest, certain types of 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 also specifically excluded from the definition of unrelated trade or business:
- Volunteer Labor - Any trade or business is excluded in which most of the work is performed for the organization without compensation. Some fund-raising activities, such as volunteer operated concession sales, may meet this exception.
- Convenience of Members - Any trade or business is excluded that is carried on by an organization primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this would be a school cafeteria or school bookstore.
- Selling Donated Merchandise - Any trade or business is excluded that sells merchandise that the organization received as gifts or contributions. Many thrift shop operations run by exempt organizations would meet this exception.
IRS References: Publication 598, IRS Form 990-T