Key Takeaways:
- Many common nonprofit revenue activities can unintentionally trigger unrelated business income tax (UBIT), especially as organizations diversify funding sources.
- UBIT applies when income comes from activities that are regularly carried on and not substantially related to a nonprofit’s mission.
- Understanding common UBIT triggers, tax rates, deductions, and filing requirements can help nonprofits avoid surprises during the 2026 filing season.
- With early review and clear documentation, nonprofits can pursue new revenue ideas while staying compliant and protecting their mission.
Funding gaps, staffing churn, program demand, board expectations — nonprofits live with enough curveballs already. Taxes shouldn’t be another one. But as funding gets more complex and unpredictable, many organizations are bringing in money in new ways to stay steady and keep programs running, whether that’s by renting space, selling merch, running a fee-based program, or taking ads. That’s smart, but it can also mean bumping into unrelated business income tax (known as UBIT) without realizing it.
And with the 2026 filing season coming up, this is one of those areas that’s worth a clear look now, so you don’t have to scramble later. Let’s walk through what UBIT is, what usually triggers it, and how to stay on solid ground without shutting down good revenue ideas.
Why Does UBIT Matter for Nonprofits?
So, what is unrelated business income tax? It’s the tax nonprofits pay on income that comes from activities outside their charitable purpose.
A helpful way to think about this is the difference between mission income and extra income. Program service revenue comes from the work you exist to do, the services, programs, or activities that directly carry out your purpose. Unrelated business income comes from a money-making activity that supports the mission, but isn’t actually part of delivering it.
Both can be good and necessary. The difference is tax treatment: Mission-tied revenue is generally treated as part of your charitable work, while revenue from a side activity that doesn’t advance your purpose may be taxable.
If you’re feeling uneasy reading that, you’re not alone. Most nonprofit leaders were never trained to spot tax issues while also running programs, leading staff, and serving the community. This is one of those “we didn’t know what we didn’t know” areas — and that’s exactly why it’s worth a quick check before 2026 filings are due.
What Counts as Unrelated Business Income?
The IRS uses a three-part definition to determine UBIT for nonprofits. An activity usually creates unrelated business income for nonprofits when it is:
- A trade or business. Something you do to make money, like selling goods or services.
- Regularly carried on. It happens with some frequency, not just once in a while. Specifically, it happens with the frequency with which an organization designed to do that activity carries on the program.
- Not substantially related to your exempt purpose. The activity doesn’t directly advance why you’re tax exempt in the first place.
That third one is where a lot of people get stuck, so here’s a simple way to think about it: If the activity exists mainly to generate money, even if you use the money for good things later, it may be unrelated. If the activity is part of how you carry out your mission, it’s usually related (even if it brings in revenue).
A few everyday examples of unrelated business income include:
- Selling ads in your newsletter or on your website.
- Renting out your building for weddings or corporate events that aren’t tied to your programs.
- Running a gift shop or online store that sells items unrelated to your services.
- Offering paid webinars to the general public that don’t connect to your mission.
- Operating a café or parking lot mainly for non-program visitors.
None of those are inherently bad. They’re just the kind of things that can create unrelated business taxable income if they meet the IRS test to be unrelated business income.
What Are the UBIT Triggers Nonprofits
Miss Most Often?
Here’s where we see leaders stumble, not because they’re careless, but because the rules are unintuitive:
- Sponsorship vs. advertising
A sponsor giving you money in exchange for a logo placement or a “thanks to our supporters” mention is usually fine. But if you’re promoting their product, listing prices, or pushing people to buy, that looks like advertising, and advertising revenue is usually taxable.
- Selling to the general public
If you’re selling something mainly to support your programs, great. If you’re selling it like a business would — widely, repeatedly, and not tied to mission delivery — that’s where UBIT can show up.
- Pass-through income
If your nonprofit owns part of a partnership or LLC that runs a business, that income can flow through to you and be treated as unrelated, especially if the business is not taxed as a C Corp.
- Debt-financed property
Buying a building with a loan and then renting it out can trigger special UBIT rules. The IRS may treat some of that rental income as taxable because of the debt involved.
These are some of the most common UBIT triggers nonprofits run into, but they aren’t the only ones. UBIT can get nuanced quickly based on how an activity is structured and documented, so if questions come up, reaching out to Charitable Allies for clarity can help avoid surprises later.
How Does the UBIT Tax Rate Work, and What Can You Deduct?
Let’s talk about the part everyone wants clarity on: What do you owe if this income is taxable? Under current law, the UBIT tax rate is a flat 21%.
The good news? The IRS taxes net income, not gross. That means you can deduct expenses that are ordinary, necessary, and directly connected to the unrelated activity, like:
- Staff time spent running the activity.
- Supplies and materials.
- A fair share of rent, utilities, and other overhead.
- Depreciation on equipment used in the activity.
The key is accuracy. If you’re using your building for both mission programs and rentals, you need a reasonable way to allocate costs between them. Messy allocation can make your tax bill higher than it should be or raise questions you don’t want.
When Do You Have to File Form 990-T?
Form 990-T is how you report any UBIT tax nonprofit income you earned during the year. According to the IRS Form 990-T instructions, you need to file if your nonprofit has $1,000 or more of gross unrelated income in the year.
Timing wise, the 990-T Form is due on the 15th day of the 5th month after your tax year ends. So, for most calendar-year organizations, your 2025 unrelated income return will be due May 15, 2026. If you expect to owe $500 or more in tax, you may need to pay estimated taxes quarterly.
How Can You Reduce UBIT Risk Without Losing
Good Revenue Ideas?
You don’t have to stop trying new revenue ideas. You just want to make sure they’re set up safely. Here are a few practical ways to lower your risk:
- Label activities clearly in your records. If something is mission-related, document why. Write it down in a way a stranger could understand later.
- Check how often you’re doing it. A once-a-year fundraiser with a small sales component is different from a year-round retail operation.
- Review new revenue ideas early. It’s much easier to adjust early than to unwind something after it’s been running for two years.
- Consider isolating a business activity. Some nonprofits set up a taxable subsidiary for larger unrelated ventures. That doesn’t eliminate tax, but it can protect the nonprofit’s core operations and keep reporting clear.
None of this is meant to scare you. It’s meant to keep you in control.
How Can Charitable Allies Help?
UBIT questions usually don’t show up as neat little tax puzzles. They show up as real-life moments:
- “We started doing this to help cover costs — does it count as unrelated?”
- “A partner offered us this opportunity. What’s the right way to structure it?”
- “We don’t want to mess up our filing or put the mission at risk. What do we do next?”
If that’s where you are, you don’t have to guess your way through nonprofit tax compliance.
Charitable Allies helps nonprofits sort through UBIT in a way that feels clear and manageable, looking at your revenue streams, figuring out what’s mission-related versus taxable, and helping you document and report things correctly. Our nonprofit lawyers can also help you think through smart options if an activity is growing and needs a cleaner structure.
The goal isn’t to make you a tax pro. The goal is peace of mind — knowing your nonprofit can keep funding the work you care about and stay compliant, without that nagging “what if we’re getting this wrong?” feeling hanging over your team.
If you want a second set of eyes on a revenue stream before you file for 2026, reach out. We’ll help you find the right path forward so you can keep serving your community with confidence.
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