Unrelated Business Income (UBI)

Most PTAs are exempt from federal income tax under Section 501(c)(3) of the IRC and are further defined as public charities (not private foundations).

Having tax-exempt status means that a PTA does not pay federal income tax on income from activities that are substantially related to the purpose for which the PTA was given tax-exempt status.

However, the PTA may be required to pay tax on other types of income, referred to as unrelated business income (UBI). UBI is income that is not related to the organization’s exempt purpose.

If a PTA receives more than $1000 in UBI, it must file Form 990T.  Nonprofits risk losing their tax-exempt status only if such activities become the primary focus and make the tax-exempt mission secondary.

Income is classified as UBI when three factors exist: Œ

  • A trade or business (“active”) Œ
    • For the activity to be considered a business, the nonprofit must take an active role in the generation of the income.
    • The activity must provide income, but does not have to produce a profit.
  • Regularly carried on (in contrast to only “discontinuously or periodically”) Œ
    • IRS regulations state that activities that are carried on only “discontinuously or periodically” will not be considered to be regularly carried on.
    • If an activity is of short duration, but follow-up or preparation is carried on over a long period, the income from that activity could be UBI.
    • An activity occurring only once per year may yield UBI if a commercial company performing the same activity would also be active only once a year.
  • Unrelated to the organization’s tax-exempt purpose
    • If an activity is not substantially related to the PTA’s mission, then it could be considered unrelated to fulfilling the tax-exempt purpose of the PTA.
    • The substantial relation of the activity to the PTA’s tax-exempt purpose cannot come solely from the PTA’s need for money.

The income from most PTA fundraising activities is exempt from federal income taxes because of the following exceptions to the general rules: Œ

  • Volunteer activities (volunteers must do “substantially all” of the work—at least 85%) Œ
  • Low-cost merchandise (items are given in conjunction with solicitation of charitable contributions) Œ
  • Donated merchandise (“substantially all” of the items sold must be donated)

The destination or use of the income has no bearing on whether it is unrelated business income. The determination is made by how the income is earned.

Judgment of whether an activity is related or unrelated is made on a case-by-case basis.

The federal, state, and local governments may have different standards for pursuing the charge of UBI, although most state and local governments follow the federal rules.  Contact kids@utahpta.org if you have more questions. 

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