IRS Form 990-T: Definition, Example, and FAQs
IRS Form 990-T, also known as the 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 income (UBI). This form falls under the broader category of tax compliance for nonprofit entities, ensuring that organizations operating under an exempt purpose pay their fair share of taxes on activities that are not substantially related to their primary mission.21
Even though an organization may be recognized as a tax-exempt organization by the Internal Revenue Service (IRS), it can still be subject to tax on income derived from a trade or business that is regularly carried on and is not substantially related to its charitable, educational, or other exempt purpose. The threshold for filing IRS Form 990-T is typically when an organization has gross income of $1,000 or more from such unrelated business activities.20
History and Origin
The concept of taxing unrelated business income arose to address concerns that tax-exempt organizations might gain an unfair competitive advantage over for-profit businesses by engaging in similar commercial activities without incurring income tax.19 To level the playing field, the Unrelated Business Income Tax (UBIT) was enacted as part of the Revenue Act of 1950.18 This legislation aimed to ensure that tax-exempt entities would not unfairly compete with taxable companies in profit-generating activities.17 Prior to 1950, some tax-exempt organizations operated commercial enterprises, such as C.F. Mueller Co., which, despite being owned by New York University, produced and sold macaroni and was exempt from federal income taxes on those profits. This specific case was often cited as an example of the loophole UBIT was designed to close.16
Key Takeaways
- IRS Form 990-T is used by tax-exempt organizations to report and pay taxes on income from activities not substantially related to their exempt purpose.
- The tax applies to unrelated business income (UBI) of $1,000 or more.
- UBIT was enacted in 1950 to prevent unfair competition between tax-exempt and for-profit entities.
- The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant changes, requiring organizations to compute UBI separately for each trade or business.15
- Filing Form 990-T is an additional requirement to the annual information return, such as IRS Form 990.14
Interpreting the IRS Form 990-T
Interpreting IRS Form 990-T involves understanding the various components that contribute to an organization's tax liability on unrelated business income. The form requires organizations to detail their gross income from unrelated business activities and then apply relevant deductions to arrive at their taxable income.13 The tax is generally calculated using corporate tax rates, or trust rates, depending on the organization's legal structure.12 Proper completion ensures compliance with IRS regulations and helps maintain the organization's tax-exempt status.11
Hypothetical Example
Consider "Helping Hands Charity," a public charity recognized as a 501(c)(3) nonprofit organization. Its primary mission is to provide educational workshops. However, to raise additional funds, Helping Hands operates a small, regular online store selling branded merchandise (t-shirts, mugs) that are not directly related to its educational activities.
In a given tax year, Helping Hands Charity generates $15,000 in gross sales from its online store. After accounting for the cost of goods sold and other direct expenses related to the store, the net income from this venture is $7,000. Since this $7,000 is considered unrelated business income and exceeds the $1,000 threshold, Helping Hands Charity would be required to file IRS Form 990-T. On this form, they would report the $7,000 as their unrelated business net income, and then calculate the tax owed based on the applicable corporate tax rate.
Practical Applications
IRS Form 990-T is a critical tool in tax compliance for a wide array of tax-exempt entities, including charities, universities, hospitals, and pension funds, that engage in commercial activities. It ensures that these organizations report and pay taxes on income derived from sources not directly related to their exempt purpose. For instance, a university renting out its stadium for a professional sports event during the off-season may generate UBI, which would need to be reported on Form 990-T. Similarly, advertising income in a publication otherwise related to an exempt purpose might also be classified as UBI.10 The IRS provides specific instructions and guidance to help organizations understand their filing requirements for this form.9
Limitations and Criticisms
One significant limitation of IRS Form 990-T, particularly after the Tax Cuts and Jobs Act (TCJA) of 2017, is the complexity introduced by the "siloing" rule. This rule requires tax-exempt organizations to calculate unrelated business taxable income (UBTI) separately for each unrelated trade or business, meaning losses from one unrelated activity can no longer offset income from another.8 For example, if a private foundation has a loss from one unrelated business and a profit from another, it cannot net these amounts, potentially increasing its overall taxable income and tax liability. This change created administrative burdens and increased tax obligations for many organizations.7 Critics also argue that determining what constitutes a "regularly carried on" trade or business and what is "substantially related" to an exempt purpose can be subjective and lead to audit challenges.6 These complexities necessitate careful record-keeping and often professional tax advice to ensure accurate reporting and avoid potential audits or penalties.
IRS Form 990-T vs. IRS Form 990
While both IRS Form 990-T and IRS Form 990 are filed by tax-exempt organizations, they serve distinct purposes. IRS Form 990 (and its variations like 990-EZ and 990-PF) is an annual information return that provides the public and the IRS with detailed information about an organization's finances, governance, programs, and activities. It's primarily a transparency and compliance tool, not a tax payment form. In contrast, IRS Form 990-T is specifically used to report and pay the Unrelated Business Income Tax (UBIT) on income generated from activities not substantially related to the organization's tax-exempt mission. An organization might be required to file both forms in a given year if it has UBI.5
FAQs
What is unrelated business income (UBI)?
Unrelated business income is income derived by a tax-exempt organization from a trade or business that is regularly carried on and is not substantially related to the organization's exempt purpose. This means the activity does not contribute importantly to the accomplishment of the organization's charitable, educational, or other exempt functions.4
When is IRS Form 990-T due?
The due date for IRS Form 990-T depends on the type of organization. For trusts, it's generally the 15th day of the fourth month after their tax year ends. For corporations, it's the 15th day of the fifth month after their tax year ends.3 Extensions can typically be requested.
Are there any exceptions to UBIT?
Yes, certain types of income and activities are excluded from unrelated business income. Examples include passive income like dividends, interest, royalties, and most rents from real property. Activities where substantially all the work is performed by volunteers, or activities carried on primarily for the convenience of the organization's members, are also often excluded.2
What happens if an organization fails to file Form 990-T?
Failure to file IRS Form 990-T when required, or failure to pay the tax due, can result in penalties, including late filing and late payment penalties. Repeated or substantial unrelated business income that is not properly reported could also potentially jeopardize an organization's tax-exempt status.1