Form 990 t

What Is Form 990-T?

Form 990-T, officially known as "Exempt Organization Business Income Tax Return," is an annual tax form used by tax-exempt organizations to report and pay taxes on their unrelated business taxable income (UBTI). This income is derived from a trade or business that is regularly carried on and is not substantially related to the organization's exempt purpose. As a critical component of Tax Law for non-profit entities, Form 990-T ensures that these organizations do not gain an unfair competitive advantage over for-profit businesses by engaging in commercial activities. An organization generally must file Form 990-T if its gross income from an unrelated trade or business is $1,000 or more.

History and Origin

The concept of taxing income from activities unrelated to an organization's tax-exempt purpose emerged to address concerns about unfair competition. Historically, prior to 1950, exempt organizations could earn tax-free income from commercial business activities unrelated to their mission, provided the net profits were used for exempt purposes. A notable case involved the C.F. Mueller Company, a pasta manufacturer, which was donated to New York University Law School in 1947. The company subsequently ceased paying income tax, claiming charitable status. Congress responded to this perceived competitive imbalance by enacting the Revenue Act of 1950. This act introduced the unrelated business income tax (UBIT), fundamentally shifting the basis for tax exemption from the use of funds to the source of funds. Since then, revenue derived from activities not substantially related to an organization's exempt purpose became subject to taxation.¹³,¹² The Internal Revenue Service (IRS) subsequently developed tax forms and publications, such as Publication 598, to provide detailed guidance on UBIT.¹¹

Key Takeaways

• Form 990-T is filed by tax-exempt organizations to report and pay tax on income from business activities unrelated to their primary mission.
• UBIT applies if the activity is a trade or business, regularly carried on, and not substantially related to the organization's exempt purpose.
• Organizations must generally file Form 990-T if their gross unrelated business income is $1,000 or more.
• The tax on unrelated business income is typically calculated at corporate tax rates.
• The purpose of Form 990-T and UBIT is to prevent unfair competition between tax-exempt and for-profit entities.

Formula and Calculation

The calculation of taxable income reported on Form 990-T involves determining the net income from unrelated business activities. For each separate unrelated trade or business, an organization must compute its gross income and directly connected deductions.

The general formula for Unrelated Business Taxable Income (UBTI) before net operating losses is:

Organizations may need to complete a separate Schedule A (Form 990-T) for each unrelated trade or business to detail income and allowable deductions, especially following changes enacted by the Tax Cuts and Jobs Act of 2017, which requires organizations to calculate UBTI separately for each trade or business.¹⁰ The sum of positive amounts from all Schedule As is then reported on the main Form 990-T.⁹

Interpreting the Form 990-T

Interpreting Form 990-T primarily involves understanding the scope and nature of an organization's unrelated business activities and their resulting tax liability. If an organization files Form 990-T, it signifies that it is generating income from activities that fall outside its core tax-exempt mission, even if those profits are used to further its exempt purpose. The form details the specific sources of unrelated business income, the expenses attributable to these activities, and the final taxable amount. A consistent or growing amount of UBTI reported on Form 990-T might indicate a significant engagement in commercial ventures, which requires careful tax compliance to avoid penalties. The Internal Revenue Service provides detailed instructions to help organizations correctly identify, calculate, and report this income.⁸

Hypothetical Example

Consider "Helping Hands Charity," a tax-exempt organization primarily focused on providing educational programs. In an effort to raise additional funds, Helping Hands Charity operates a small, public-facing coffee shop daily that is open to the general public, not just its program participants. The coffee shop's operation is a regular trade or business and is not substantially related to the charity's educational mission.

In a given year, the coffee shop generates $50,000 in gross sales. Expenses directly connected to the coffee shop's operation, such as rent, supplies, and employee wages, amount to $30,000.

To determine its UBTI for this activity, Helping Hands Charity would calculate:
Gross Unrelated Business Income: $50,000
Directly Connected Deductions: $30,000
UBTI for the coffee shop: $50,000 - $30,000 = $20,000

Since the UBTI of $20,000 exceeds the $1,000 threshold, Helping Hands Charity would be required to file Form 990-T to report this income and pay the applicable tax.

Practical Applications

Form 990-T is a crucial document in the realm of non-profit taxation and compliance. Its practical applications include:

• Tax Reporting for Non-Profits: Any tax-exempt organization, including charitable organizations, educational institutions, and other non-profits, that earns $1,000 or more from an unrelated trade or business must use Form 990-T to report this income and associated tax.⁷
• Ensuring Fair Competition: By requiring tax-exempt entities to pay tax on income derived from activities that compete with taxable businesses, Form 990-T helps to level the economic playing field. This is a core principle behind the Unrelated Business Income Tax (UBIT) framework.⁶
• Compliance and Oversight: The filing of Form 990-T allows the IRS to monitor the commercial activities of tax-exempt organizations, ensuring they operate within the bounds of their exempt purpose and preventing potential abuses of their tax-advantaged status.⁵
• Financial Planning for Exempt Organizations: Organizations must strategically plan their activities to understand potential UBIT implications. This includes distinguishing between mission-related activities and those that could generate taxable unrelated business income. The Council on Foundations offers guidance on UBIT to assist non-profits in this area.⁴

Limitations and Criticisms

While Form 990-T and the UBIT framework aim to create fairness, they are not without limitations and criticisms. One common area of complexity is determining whether a specific activity constitutes an "unrelated trade or business." The three-part test—whether an activity is a trade or business, regularly carried on, and not substantially related to the exempt purpose—can be subject to interpretation and lead to disputes. For instance, activities that are "intermittent" or "seasonal" might still be deemed "regularly carried on" by the IRS, leading to unexpected tax consequences.

An³other challenge stems from the allocation of expenses. Organizations must accurately allocate expenses directly connected to unrelated business activities, which can be difficult when resources are used for both exempt and non-exempt purposes. Furthermore, changes in tax law, such as those introduced by the Tax Cuts and Jobs Act of 2017, have added layers of complexity, requiring organizations to calculate UBTI separately for each unrelated trade or business, which can prevent the offsetting of losses from one unrelated business against gains from another. Thi²s "siloing" of income and losses has been a point of contention for some organizations.

Form 990-T vs. Form 990

Form 990-T and Form 990 are both tax forms filed by tax-exempt organizations, but they serve distinct purposes.

While many tax-exempt organizations are required to file Form 990 (or a variation like 990-EZ or 990-PF) annually, only those that engage in certain commercial activities that generate unrelated business income will also need to file Form 990-T. The two forms address different aspects of a non-profit's financial and tax reporting obligations.

FAQs

Who needs to file Form 990-T?

Any tax-exempt organization, including charities, educational institutions, and other non-profits, that has gross income of $1,000 or more from an unrelated trade or business during the tax year generally needs to file Form 990-T.

What is "unrelated business income"?

Unrelated business income is income from a trade or business that is regularly carried on by a tax-exempt organization and is not substantially related to the performance of its exempt purpose or function. Examples might include a museum operating a retail store that sells items unrelated to its exhibits or a university running a publicly accessible hotel.

How is the tax on Form 990-T calculated?

The tax is generally calculated on the unrelated business taxable income (UBTI) at the corporate tax rate, or trust tax rates for tax-exempt trusts. The UBTI is derived by subtracting allowable deductions directly connected to the unrelated business activity from the gross income generated by that activity.

What is the filing deadline for Form 990-T?

For most tax-exempt organizations, Form 990-T is due on the 15th day of the 5th month after the end of their tax year. For trusts described in section 401(a) and 408(a), the deadline is the 15th day of the 4th month. Extensions may be available.

Are all income-generating activities of a non-profit subject to UBIT?

No, not all income-generating activities are subject to UBIT. Certain types of income are specifically excluded, such as dividends, interest, royalties, and most rents from real property. Additionally, activities where substantially all the work is performed by volunteers, activities conducted for the convenience of members, or the sale of donated merchandise are generally excluded from UBIT.¹