What Is Form 990-T for Unrelated Business Income?

Tax-exempt organizations may engage in activities that generate taxable income. This income, derived from ventures not directly linked to their primary mission, requires reporting on Form 990-T, the “Exempt Organization Business Income Tax Return.” This form is used to calculate and remit taxes on profits from such unrelated business activities.

Understanding Unrelated Business Income

The trigger for filing Form 990-T is the receipt of Unrelated Business Income (UBI). The Internal Revenue Service (IRS) applies a three-part test to determine if an activity generates UBI. First, the activity must be a trade or business that involves the sale of goods or services. Second, the trade or business must be “regularly carried on,” implying a frequency comparable to similar commercial activities. Third, the activity must not be “substantially related” to the organization’s exempt purpose, meaning it does not contribute importantly to its mission.

For instance, if a museum operates a public parking lot, the income could be considered UBI because it is a commercial service not directly related to its historical mission. Similarly, if a university runs a commercial travel agency for the public, the profits would likely be classified as UBI. A common source of UBI for many nonprofits is advertising revenue from publications or on websites.

Certain types of income are excluded from the definition of UBI. These exclusions cover passive income sources, income from research conducted for any government entity, and gains or losses from the sale of property not held for regular sale to customers. Passive income sources include:

• Dividends
• Interest
• Royalties
• Certain rental income

Activities meeting specific operational criteria are also exempt from being classified as an unrelated business. An exclusion applies to any trade or business where substantially all the work is performed by volunteers without compensation. Another exclusion covers businesses operated for the convenience of its members, students, patients, or employees, such as a hospital cafeteria. The sale of merchandise received as gifts or contributions is also not considered an unrelated business.

Filing Requirements for 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. This threshold applies to total income before any expense deductions are taken. This filing requirement is separate from the organization’s annual information return, like Form 990 or 990-EZ, and applies to most organizations exempt under Internal Revenue Code Section 501(c) and state colleges and universities.

The deadline for filing Form 990-T is determined by the organization’s fiscal year-end. For organizations on a calendar year, the return is due by the 15th day of the fifth month after the tax year ends, which is May 15th. An automatic six-month extension can be obtained by submitting Form 8868, “Application for Extension of Time To File an Exempt Organization Return,” by the original due date. An extension to file is not an extension to pay any tax owed.

Information Needed to Complete Form 990-T

An organization must gather specific financial records before preparing Form 990-T. The form requires separate reporting for each distinct unrelated trade or business activity. This “siloing” rule means that deductions from one unrelated business can only be used to offset income from that same business.

The primary information required is the gross income from each unrelated business, which is all revenue before expenses are subtracted. The organization must also assemble records of all allowable expenses directly connected with that specific business. Examples of direct expenses include the cost of goods sold, salaries for employees in the unrelated business, and other operational costs.

Organizations must also document the method for allocating indirect expenses. These are costs that benefit both exempt functions and unrelated business activities, such as rent, utilities, or administrative salaries. A reasonable basis for allocation must be established and applied consistently. For example, if a business occupies 20% of a building’s square footage, allocating 20% of the rent and utility costs to that business is a common practice.

Calculating and Submitting the Tax

To calculate tax liability, subtract the allowable direct and allocated indirect expenses from the gross income of each specific unrelated business activity. A specific deduction of $1,000 is permitted against the total unrelated business taxable income. The remaining net taxable income is then subject to the corporate income tax rate of 21%.

The IRS mandates electronic filing of Form 990-T for most organizations through an approved e-file provider. Payment of any tax due should also be made electronically. The most common method for payment is the Electronic Federal Tax Payment System (EFTPS), a free service from the U.S. Department of the Treasury.

If an organization anticipates its total tax for the year will be $500 or more, it is required to make quarterly estimated tax payments. These payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the organization’s tax year. Failure to make these payments on time can result in underpayment penalties.