Unrelated business income tax (UBIT), explained

This guide is for treasurers and directors whose charity sells something, rents something out, or takes money from a business, and who want to know if the IRS will tax it. The short version: most charity income is never taxed, but some business income can be. After reading, you'll know the three tests the IRS uses, the exceptions that cover many small charities, which kinds of investment and rental income are left out, and when you must file Form 990-T.

If you're still deciding whether to start selling, begin with our guide to earned income. For state and local sales tax, which is a separate question, see sales tax and selling goods.

What UBIT is

Unrelated business income tax (UBIT) is federal income tax on profit from a business your charity runs that has little to do with its mission. The IRS defines unrelated business income as "income from a trade or business, regularly carried on, that is not substantially related" to the organization's exempt purpose.

Paying some UBIT is legal. But if unrelated business grows large compared with your charitable work, get professional advice (see "Keeping it simple" below).

The three tests

IRS Publication 598 says income is unrelated business income only if all three are true:

1. It's a trade or business. You're selling goods or services to earn income.
2. It's regularly carried on. You do it with the frequency and continuity of a normal business. Publication 598 gives two examples. A hospital auxiliary's sandwich stand for 2 weeks at a state fair is not regular. Running a commercial parking lot every Saturday, year-round, is.
3. It's not substantially related to your purpose. The activity itself must contribute importantly to your mission. Spending the profit on your mission doesn't make it related.

If any one test fails, the income isn't unrelated business income.

The exceptions small charities use most

Publication 598 lists activities that are not unrelated businesses even when all three tests would otherwise be met.

• Volunteer labor. A business where "substantially all the work is performed for the organization without compensation." A shop staffed by volunteers is the classic case.
• Donated goods. Selling merchandise "substantially all of which the organization received as gifts or contributions," such as a thrift shop of donated clothes.
• Convenience. For a 501(c)(3), a business run "primarily for the convenience of its members, students, patients, officers, or employees," such as a cafeteria for staff or a school store for students.
• Bingo, when it's legal where it's played and for-profit groups don't regularly run bingo there. Other games of chance, like raffles, aren't covered by the bingo rule, though one run with substantially all volunteer labor can fall under that exception. See raffles and gaming.
• Low-cost articles sent with a request for a donation, such as address labels mailed to people who didn't ask for them, with a note that they can keep the item whether or not they give. For 2026, Revenue Procedure 2025-32 sets the limit at articles costing $13.90 or less.
• Donor and member list exchanges or rentals between organizations that can receive deductible gifts.
• Qualified public entertainment at fairs and expositions, and qualified convention and trade show activities, for the organizations the rules describe.

Income that's left out anyway

Even inside an unrelated business, some kinds of income are excluded when you work out the tax. Per Publication 598:

• Dividends, interest and annuities are excluded.
• Royalties are excluded, but payments for personal services, such as personal appearances and interviews, are not royalties.
• Rent from real property (land and buildings) is excluded. Rent for personal property, like equipment, is not. When a lease covers both, the personal property rent can't be more than 10% of the total for all of it to be excluded. Between 10% and 50%, only the rent for the real property is excluded. If it's more than 50%, none of the rent is excluded.
• Gains from selling property are generally excluded, except for inventory and property held mainly for sale to customers.

The big exception to these exclusions is debt-financed property: property bought with borrowed money and held to produce income. Part of the income from it can be taxable. If your charity has a mortgage on a building it rents out, ask an accountant.

Sponsorships and advertising

A qualified sponsorship payment is money from a business where the business gets only an acknowledgment, such as its name or logo. That isn't unrelated business income. Publication 598 says it stops being a qualified sponsorship payment if, in return, "the organization advertises the sponsor's products or services." It counts as advertising to include price information, comparisons or claims of quality, endorsements, or inducements to buy or use the sponsor's products. Advertising sold in a newsletter or magazine has its own calculation in Publication 598.

For how to word sponsor recognition, see corporate partnerships.

When you must file Form 990-T

The IRS says an exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. Publication 598 adds that this is "the sum of the organization's gross income from all unrelated businesses." That's gross income, not profit, so you can owe a filing with no tax due.

The other key facts, from Publication 598 and the 2025 Form 990-T instructions:

• It's separate from your Form 990, 990-EZ or 990-N. A charity that files a 990-N can still owe a 990-T.
• It's filed electronically.
• Due date: the 15th day of the 5th month after your tax year ends (May 15 for a calendar year). Form 8868 gives an automatic 6-month extension to file, not to pay.
• One business at a time. If you have more than one unrelated business, you work out the income separately for each one, and a loss in one can't reduce the profit of another.
• Specific deduction. "A specific deduction of $1,000 is allowed" when working out the taxable amount.
• Tax rate. A charity taxed as a corporation multiplies its taxable amount by 21%.
• Estimated tax. You must pay quarterly estimates if you expect the tax to be $500 or more.
• It's public. A 501(c)(3) that files because it has $1,000 or more of unrelated gross income must make its Form 990-T available for public inspection.

A worked example

Here's a hypothetical case. A youth arts charity does three things to raise money:

• A holiday market, 2 weekends a year, selling art its students made in class. Probably related (selling students' work from the program), and in any case not regularly carried on. Not UBIT.
• A shop on Main Street run entirely by volunteers, selling donated books and furniture. Two exceptions apply: volunteer labor and donated goods. Not UBIT.
• Renting its studio's sound equipment to local bands every weekend, with a paid technician. A business, regular, unrelated, no exception, and equipment rent isn't excluded. Its gross income from this was $4,800 for the year, so it files Form 990-T, takes the $1,000 specific deduction and its direct costs, and pays tax on any profit left.

Keeping it simple

• Track income and costs for each activity separately from day one.
• Write down, once, why each activity is related or which exception applies, and file that note with your board papers.
• Tell your board when an unrelated activity starts and how big it is. If unrelated business grows large compared with your charitable work, get professional advice before it becomes a question about your exemption.
• Ask your state's revenue department whether your state taxes unrelated business income too. The rules vary by state.

UBIT checklist

• We've listed every activity that brings in money other than gifts and grants
• For each one, we've noted whether it's a business, regular and related
• Where we rely on an exception, we've kept the records that prove it
• We know whether our total unrelated gross income reaches $1,000
• Form 990-T and any estimated tax payments are on our calendar
• Sponsor recognition doesn't include prices, endorsements or calls to buy
• We've checked our state's rules on unrelated business income