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Unrelated Business Income Tax

Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, placed on non-profit organizations including state colleges and universities for conducting business activities that are regularly carried on, and not substanially related to their education mission.


For most organizations, a business activity generates unrelated business income subject to taxation if:

  1. It is a trade or business,
  2. It is regularly carried on, and
  3. It is not substantially related to furthering the exempt purpose of the organization.

A trade or business includes the selling of goods or services with the intention of having a profit. An activity is regularly carried on if it occurs with a frequency and continuity, similar to what a commercial entity would do if it performed the same activity. An activity is substantially related to furthering the exempt purpose of the organization if the activity contributes importantly to accomplishing the organization's purpose, other than for the sake of producing the income itself.


A university runs a pizza parlor that sells pizza to students and non-students alike. The university is a tax-exempt organization and its pizza parlor generates unrelated business income. While the tuition and fees generated by the university are tax exempt, its income from the pizza parlor is not tax-exempt because the pizza parlor is unrelated to the university's education purpose.

A counter-example is a social-service nonprofit that holds a one-time bake sale. While the sale is unrelated to their mission, it is tax-exempt because it is not regularly carried on. Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and they are pursued in a manner similar to comparable commercial activities of nonexempt organizations.


Certain types of income are not considered unrelated business income, such as income from dividends; interest; royalties; rental of real property; research for a federal, state, or local government; and charitable contributions, gifts, and grants. In addition, unrelated business income does not include income derived from the work of unpaid volunteers, income from the sale of donated goods, income from trade shows and conventions, income from legal gaming. The Internal Revenue Service does not consider the receipt of assets from a closely related tax-exempt organization to be unrelated business income.

If you believe there may be unrelated business activity in your department you should contact the Tax Manager at 734.487.0124 or