By Anna Baumgardner | 03/10/2020
What is UBTI?
“What is UBTI?” you ask. UBTI is Unrelated Business Taxable Income, which in very dry and technical terms, is income generated from activities not substantially related to an organization’s tax-exempt purpose. For example, UBTI may be generated when a church charges nearby-stadium attendees for use of the church’s parking lot; or a kitchen serving free or low-price meals to underprivileged and homeless also sells full-price gourmet meals on the weekends; or an adult literacy program rents out their facilities to local artists for art sales. Selling parking, serving gourmet meals, and housing art sales are not directly related to the nonprofits’ primary function. Performing these on-the-side activities creates taxable income – even though the proceeds may support the non-profit’s activities.
Less obviously, UBTI can be triggered not only by actual activities, but by a non-profit’s publications. Let’s assume a non-profit distributes a monthly newsletter outlining their accomplishments, goals, and upcoming events. In order to cover printing costs, the non-profit sells space in the newsletter to local businesses, where the businesses can advertise upcoming sales, and promote their work. This would generate UBTI, as the non-profit is not in the business of providing advertisement services. Alternatively, the acknowledgment of businesses that provided donations to the non-profit – such as adding the line “Printing and publication of the Glen Park Animal Sanctuary Newsletter made possible by Cathy’s Café, and Grooming by Gary” on any page – would not trigger UBTI, as the sponsors were only acknowledged, not advertised.
Non-periodic publications can contain UBTI triggers, as well. Use of the word “ad” in publications such as sponsorship packages is a very common trigger. As we have already discussed, offering to show an “advertisement” is not usually within the scope of a non-profit’s business model. For the sponsorship package, consider using terms such as “acknowledgement” or “recognition” instead of “ad” when soliciting donations. Then, to ensure that the sponsor’s placement cannot be construed as an advertisement when the acknowledgement or recognition is published, do not allow them to go beyond simple information – the sponsor’s name, address, contact information, and/or a link to the sponsor’s home website page are the safest. Sponsor placements that include pricing, “Best Deal” verbiage, or mention of upcoming promotions are easily construed as advertisements instead of simply acknowledgements of the sponsor’s support. If you write the placements yourself, be sure to use value-neutral wording, and avoid obvious endorsements and promotions of your sponsor’s sales.
Although it is less common, non-profits should also be aware of the potential UBTI trigger as a result of exclusivity arrangements. An exclusivity arrangement occurs when a singular sponsor provides payment or support, and in exchange, the non-profit will not accept sponsorship, support, or donated services from other entities for a specified time or event. Because the IRS believes that an exclusivity arrangement provides “substantial return benefit” to the sponsor, this type of arrangement will trigger often trigger UBTI if a certain “return” is met. If it is determined that all of the benefits provided to the sponsor as a result of the exclusive sponsorship are more than 2% of the sponsorship payment, the exclusivity arrangement is determined to provide “substantial return benefit,” and no portion of the sponsorship donation or support constitutes as a qualified sponsorship payment, and instead constitutes as UBTI. Because this can be a complex and confusing calculation, we recommend that you bring such an arrangement to your accountants for evaluation.
Of course, we are always happy to review your sponsorship package or publications for potential UBTI triggers, and provide information on how to address potential concerns. If your nonprofit does produce UBTI, either through activities or text, you will need to file a form 990-T. This is the IRS filing to report taxable income produced by non-taxable (nonprofit) organizations. For further information, reach out to us!
Anna Baumgardner is a licensed CPA who advises and provides outsourced accounting and CFO services for tax-exempt clients at RY CPAs.