Not All Income Used for Charitable Purposes Will Avoid UBIT

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April 8 — Just because a tax-exempt organization uses the income from an unrelated business to further its charitable purposes, it doesn't mean the activity is necessarily exempt from unrelated business income tax, IRS officials said.

To be substantially related to an organization's exempt purpose, and avoid UBIT, an unrelated business entity must “contribute importantly” to accomplishing the organization's exempt purpose, Al Page, a tax law specialist at the Internal Revenue Service Office of Exempt Organizations, said in an April 8 IRS webinar.

The size and extent of the activity in relation to the overall exempt function will be considered in determining whether the tax applies, Page said. If the activity is conducted on a larger scale than is necessary to accomplish the exempt purpose, some or all of the income may be unrelated business income.