What is unrelated business income tax (UBIT)?

UBIT is the tax a tax-exempt organization pays on income from a trade or business that is regularly carried on and not substantially related to its exempt purpose. Being exempt shields mission-related income from tax; it does not shield income from an unrelated commercial activity. That income is taxed at regular corporate rates.

When does a nonprofit have to file Form 990-T?

An exempt organization must file Form 990-T if it has $1,000 or more in gross income from an unrelated trade or business during the year. The $1,000 is a gross-income filing trigger, not a tax-free allowance — though a $1,000 specific deduction does reduce the amount ultimately taxed.

What are the three tests for unrelated business income?

Income is generally taxable as UBI when all three are true: it comes from a trade or business, that business is regularly carried on, and it is not substantially related to the organization's exempt purpose. If any one test fails — for example, the activity is only occasional or genuinely furthers the mission — it usually isn't UBI.

What income is exempt from UBIT?

Common exclusions include most passive investment income (dividends, interest, and many royalties), rent from real property, work performed substantially by volunteers, activities run for the convenience of members, and the sale of donated goods. These carve-outs mean many nonprofit revenue streams never touch UBIT — but each has conditions and exceptions.

BACK TO RESOURCES

Nonprofit Tax Services

UBIT Explained: When Your Nonprofit Owes Tax on Business Income

Tax-exempt doesn't mean tax-free. When a nonprofit runs a business unrelated to its mission, that income is taxable — and $1,000 of it triggers a Form 990-T filing.

SMAART Tax Team

March 3, 2026

6 min read

|Reviewed by Lisa Terrell, Enrolled Agent