• Explanation

A tax-exempt organizationAn entity exempt from federal income taxes on funds and income received that directly relate to its not-for-profit activities. is not taxed on income derived from activities directly related to performing its purpose (eg, charity, religion, education).  However, the organization may receive  unrelated business income (UBI) Income from operations of a business activity not associated with the exempt purpose of the organization. —trade or business income not associated with its tax-exempt purpose that is earned on a regular basis.

The IRS provides examples of activities that are specifically excluded from UBI and activities that generate UBI.  The following are among the specifically excluded activities:

• Selling items (eg, food, beverages) for the convenience of employees and other people who use the organization's facilities (Choice A)
• Selling branded merchandise that enhances public awareness of the organization and its charitable purpose (Choice C)
• Regularly conducting fundraising events (eg, casino night) as long as the events are staffed entirely by unpaid volunteers (Choice D)

A tax-exempt organization that regularly performs a trade or business that is not substantially related to its purpose (eg, leasing the facility to unrelated parties) will be subject to the UBI tax for income exceeding $1,000.  The income is taxed at the current federal corporate rate.  The fact that income is used to support the organization (eg, Lakewood) does not automatically exempt the income from UBI taxation.

Things to remember:
A tax-exempt organization that regularly performs a trade or business that is not substantially related to its purpose will be subject to the unrelated business income (UBI) tax for income exceeding $1,000.  The fact that the income is used to support the organization does not automatically exempt the income from UBI taxation.