Unrelated Business Income Tax ("UBIT")

The Council has concerns about proposals in recent years that would expand the scope of the unrelated business income tax.

Currently under Section 512(a) of the Internal Revenue Code, nonprofits are subject to tax on gross income, minus directly connected expenses, for activities that constitute an “unrelated trade or business.” The Code offers a three-pronged test for determining whether a particular activity is an “unrelated trade or business.” The activity must be (1) a trade or business that is (2) regularly carried on, and (3) isn’t substantially related to the organization’s exempt purpose. There are currently many exceptions to what activities qualify as “unrelated trade or business,” including exceptions for volunteer services.

In 2014, former House Ways and Means Chairman Dave Camp proposed expanding the situations in which UBIT is trigger in his Tax Reform Act of 2014 (H.R. 1). These situations include:

  • Royalties from the sale or licensing of name or logo;
  • Income from research that is not publicly available;
  • Qualified sponsorship payments over $25,000;
  • Gain or loss from the sale of distressed property.

The former Chairman’s bill also would change the manner in which UBIT is calculated by ending aggregate calculations for the net unrelated taxable income of an unrelated trade or business. This means that organizations utilizing a variety of sources of income might see their tax liability increase as more of these activities trigger UBIT. It may also make it more complicated for foundations to calculate the net unrelated income by adding the requirement that they be calculated separately rather than through a gross calculation.

While H.R. 1 is not currently being considered, the proposals it contains will be a starting point for future tax reform and it is important for foundations to remain vigilant and be aware of what could be on the table.