Insights
Best Practices of Highly-Effective Nonprofit Organizations
Spring 2025
Vol. 5 // Issue 1
C O N T E N TS TAX
GOVERNANCE
When “Tax-Exempt” Becomes Taxable: The Unrelated Business Income Tax
3 / OMB Issues Updates to Uniform Guidance AUDIT & ASSURANCE
6 / Use a Budget to Create Financial Stability 7 / HBK Nonprofit Solutions Contacts OUTSIDE THE LINES
By Amy J. Dalen, JD PRINCIPAL, NATIONAL TAX DIRECTOR | NAPLES, FL
I
n order to avoid paying federal (and often state) income tax on revenue generated by a nonprofit organization, the organization
• The activity must be substantially unrelated to the organization’s exempt purpose. Trade or Business: The IRS does not specifically define a trade or business. Instead, it looks at multiple factors to determine whether an activity rises to the level of a trade or business. An activity is generally found to be a trade or business if it is carried out in a business-like manner, and there is an expectation that the activity will generate a profit.
generally must affirmatively apply for tax-exempt status. The type of tax-exempt organization generally controls how much revenue can avoid tax under IRS tax rules. For example, an Internal Revenue Code (IRC) section 501(c)(3) organization may be exempt as a private foundation, but must pay income tax on net investment income, Each organization Regularly Carried On: To whereas a public charity is not determine whether an activity is type has different subject to the net investment income tax. In total, there are 29 levels of tax-exempt regularly carried on, the IRS will focus on the type of activity and the different tax-exempt organization status, but all may regularity required of that activity. types under IRC section 501(a), be subject to the For example, if an organization with 25 different categories operates a store that is open every unrelated business found under section 501(c). Each day with set hours, it would generally organization type has different income tax. be found to be regularly carried on. levels of tax-exempt status, but all In contrast, if an organization put on may be subject to the unrelated a one-time sale event at a local store to generate business income tax. revenue, the “regularly carried on” condition would likely not be met. Unrelated Business Income Definition The unrelated business income tax (UBIT) is a tax assessed on income that is generated by an unrelated trade or business. To fall under the unrelated business income rules, an activity must meet three requirements: • The activity must be considered a trade or business, • The activity must be regularly carried on, and
Substantially Unrelated: When determining whether an activity is related to an organization’s exempt purpose, the organization must analyze the activity being performed, not what is ultimately done with the revenue generated by the activity. This analysis is very fact-specific, and may be challenging to determine. For example, an organization whose exempt purpose is the furtherance of the arts within a community may
8 / Nonprofit Pitfalls: Private Inurement, Private Benefit C LIENT SPOTLIGHT
12 / ISLE Inc.: Uniquely Helping Adults with Special Needs
ABOUT HBK NONPROFIT SOLUTIONS HBK Nonprofit Solutions is a dedicated team of subject matter experts within HBK CPAs & Consultants, an Accounting Today Top 50 CPA firm. With more than 800 clients in the nonprofit sector, and more than 75 years providing financial compliance and consulting to nonprofits, we offer the hands-on experience and technical skills to help nonprofit organizations fulfill their missions.