What Is Form 990-T for Unrelated Business Income Tax?

Form 990-T, the Exempt Organization Business Income Tax Return, is a specialized tax return used by organizations that are otherwise exempt from federal income tax. Its purpose is to report and pay tax on income generated from activities that are not directly related to the organization’s exempt function. This ensures that tax-exempt entities do not have an unfair competitive advantage over for-profit businesses when they engage in similar commercial enterprises. The filing of Form 990-T is a separate requirement from the annual information returns, such as Form 990 or 990-EZ, that most exempt organizations must file.

Organizations Required to File

The requirement to file Form 990-T applies to a broad range of tax-exempt organizations. This includes entities recognized as exempt under various subsections of the Internal Revenue Code, such as charitable organizations, social welfare groups, labor unions, and business leagues. The filing trigger is not based on the organization’s size or total revenue, but on a specific income threshold from unrelated business activities.

Any exempt organization with gross income of $1,000 or more from an unrelated trade or business during its tax year must file Form 990-T. This threshold applies even if the organization ultimately has a net loss from these activities after deducting expenses. The filing requirement also extends to certain state and municipal colleges and universities, which may engage in activities that generate unrelated business income.

Identifying Unrelated Business Income

Unrelated business income (UBI) is determined by a three-part IRS test. For income to be classified as UBI, it must come from a trade or business that is regularly carried on and not substantially related to the organization’s exempt purpose. All three conditions must be met for the income to be taxable.

A “trade or business” includes any activity conducted to produce income from selling goods or services, like a historical society’s gift shop. The “regularly carried on” test examines the frequency and continuity of the activity compared to similar for-profit businesses. A university selling advertising in a weekly sports program meets this test, while a one-time bake sale would not.

The “not substantially related” test is often the most complex. The activity must contribute importantly to the organization’s exempt purposes beyond just producing funds. A museum operating a cafeteria for the convenience of its staff and visitors is conducting a related activity. However, if that same museum also operates a commercial catering service for outside events, the income from the catering would likely be considered unrelated.

The tax code provides several specific modifications and exclusions from UBI. Passive income sources such as dividends, interest, annuities, and certain royalties are generally excluded. Rental income from real property is also typically excluded, though this exclusion can be voided if substantial personal services are provided with the rental or if the rent is based on a percentage of the lessee’s profits.

Gains or losses from the sale of property that is not inventory or held primarily for sale to customers are also excluded. There are further exceptions for activities where substantially all the work is performed by volunteers, income from selling donated merchandise, and revenue from certain qualified convention and trade show activities.

Information Needed to Complete Form 990-T

To accurately complete Form 990-T, an organization must gather detailed financial records for each separate unrelated business activity. If an organization has more than one unrelated trade or business, it must calculate the income and deductions for each one separately on Schedule A of Form 990-T. Under this rule, losses from one unrelated business activity cannot be used to offset the net income from a different unrelated business activity.

The calculation requires identifying and documenting all allowable deductions directly connected with the unrelated business. This includes direct expenses like the cost of goods sold, salaries for employees working exclusively on the unrelated activity, and marketing costs. For example, a charity operating a retail store can deduct the purchase price of the merchandise it sells, the wages of the store clerks, and the cost of advertising for the store.

Organizations must also develop a reasonable method for allocating indirect expenses, or overhead, between their exempt functions and their unrelated business activities. These shared costs can include rent for a facility used for both purposes, utilities, and salaries for administrative staff who support both functions. The allocation must be based on a consistent and logical method, such as the amount of time staff spends on each function or the square footage of a building used for each purpose.

The Filing Process

The due date for the return is generally the 15th day of the 5th month after the end of the organization’s accounting period (May 15th for calendar-year filers). For certain entities, including employees’ trusts and IRAs, the deadline is the 15th day of the 4th month after their tax year ends. Form 990-T must be filed electronically.

An organization can request an automatic six-month filing extension by submitting Form 8868 before the original due date. This extension applies only to filing the return, not to paying the tax. Any tax liability must be estimated and paid by the original deadline to avoid interest and penalties.

If an organization expects its tax liability for the year to be $500 or more, it must make quarterly estimated tax payments. These payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. Failure to file the return or pay the tax on time can result in IRS penalties.