What Is Form 990-T and Who Needs to File It?

Form 990-T, the Exempt Organization Business Income Tax Return, is used by tax-exempt organizations to report and pay tax on income from activities unrelated to their primary mission. The U.S. tax code requires them to pay tax on profits from commercial-like ventures. This policy ensures that tax-exempt organizations do not have an unfair competitive advantage over for-profit businesses offering similar goods or services.

This form operates alongside an organization’s main annual information return, such as a Form 990 or 990-EZ, but serves a different function. It isolates the financial results of unrelated business activities to calculate a specific tax liability.

Identifying Unrelated Business Income

The Internal Revenue Service (IRS) classifies income as Unrelated Business Income (UBI) if it meets three criteria. The activity must be a trade or business, be regularly carried on, and not be substantially related to the organization’s exempt purpose. If any one of these conditions is not met, the income is not considered UBI.

The first test considers whether the activity is a “trade or business,” which involves the sale of goods or performance of services to produce income, such as a museum gift shop. The second test, “regularly carried on,” examines the frequency and continuity of the activity. A daily coffee shop run by a nonprofit would meet this standard, whereas a single annual fundraising dinner would not.

The final test is whether the activity is “substantially related” to the organization’s exempt purpose, meaning the activity itself must contribute to achieving the mission beyond just providing funds. For instance, if a historical society sells reproductions of historical artifacts, that income is likely related. If that same society sells modern electronics, the income would be unrelated. Common sources of UBI include paid advertising, sales of unrelated merchandise, and certain income from debt-financed property.

Specific statutory exceptions prevent certain income from being classified as UBI, even if it meets the three tests. These exclusions cover passive income sources such as:

• Dividends
• Interest
• Certain royalties
• Most rental income from real property

Income from activities where nearly all work is performed by unpaid volunteers is also excluded. Another exception is for businesses operated for the convenience of an organization’s members, students, patients, or employees, such as a hospital cafeteria.

Determining the Filing Requirement

An exempt organization must file Form 990-T if it has $1,000 or more of gross income from an unrelated trade or business during its tax year. This threshold is based on total revenue before any expenses are deducted. The filing obligation exists even if the unrelated business activity operates at a loss after expenses are factored in.

This filing rule applies to a wide range of entities otherwise exempt from federal income tax. This includes charities recognized under Internal Revenue Code Section 501, social welfare organizations, labor unions, and business leagues. It also extends to certain government-affiliated entities, such as state colleges and universities, that engage in activities outside their educational purpose.

Information and Calculations for Form 990-T

Preparing Form 990-T involves gathering financial information and performing calculations to arrive at the taxable income. The first step is to collect basic identifying details for the form, including:

• The organization’s legal name
• Address
• Employer Identification Number (EIN)
• The tax year for which the return is being filed

The core of the form is calculating the Unrelated Business Taxable Income (UBTI). This starts with summing the gross income from all unrelated business activities, from which the organization subtracts allowable deductions. Expenses must be “directly connected” with the UBI-generating activity, meaning they have a primary relationship to it. Examples include the cost of goods sold, salaries for staff working on the venture, or advertising for the activity.

After subtracting direct expenses, the tax code allows for a specific deduction of $1,000. The final figure after all deductions is the UBTI. This is the amount upon which the tax is calculated using corporate tax rates.

The Filing Process

The filing deadline for Form 990-T depends on the organization type. For most exempt organizations, the return is due by the 15th day of the 5th month after their tax year ends, which is May 15 for calendar-year filers. For employees’ trusts and IRAs, the deadline is the 15th day of the 4th month after the tax year ends, or April 15 for a calendar-year filer.

Most organizations are required to file Form 990-T electronically through an approved e-file provider. If the form shows a tax liability, payment must be made, commonly through the Electronic Federal Tax Payment System (EFTPS). If an organization anticipates its annual tax will be $500 or more, it must make estimated tax payments throughout the year.

If an organization needs more time to complete its return, it can request an automatic six-month extension by filing Form 8868, Application for Extension of Time To File an Exempt Organization Return, on or before the original due date. This extension provides more time to file but not more time to pay any tax that is due.