Unrelated Business Income – Part 1
Unrelated Business Income – Part 1
I was privileged to attend a webinar where Mike Batts, CPA presented great information about the Unrelated Business Income issue that non-profits must deal with.
So, what is Unrelated Business Income (UBI)? Generally, this is income generated from a “trade or business” that is “regularly carried on” and that is NOT “substantially related” to the organization’s exempt purpose.
Some examples might be:
• Operating a public restaurant or coffee bar (does not include your coffee kiosk during church)
• Selling unrelated items in a bookstore
• Selling advertising
• Leasing out your parking lot
Unrelated Business Income may also be generated from the rental of equipment or real property that is “debt financed”. Was there debt incurred (and still existing) to acquire this particular property? There are a variety of exceptions to this definition and you would want to research this further.
“Trade or Business” means there has to be a profit motive involved in the activity.
“Regularly Carried on” means opened as often as a similar business in that industry.
“Substantially Related” means the activity, itself, must be substantially related to one or more of your church’s exempt purposes. Has your church defined well its exempt purposes?
When UBI reaches the level of 10 to 15% of total revenues, it is definitely something you need to address seriously. This is just a guideline to ensure the UBI is not a threat to the exempt status.
If your activity is primarily staffed by volunteers and/or primarily selling donated items, revenue would be exempted from UBI activities most likely.
Mr. Batts talks about how UBI can be a safe and legal activity as long as the rules are followed carefully.
Part 2 of this series will discuss some of the most common concerns about UBI. Stay tuned!
Does your church need accounting assistance? Contact GoodBooks today!