What it means
Form 990-T is important because even tax-exempt organisations can earn income that does not align with their core mission. This income is called 'unrelated business income' (UBI), meaning profit from a trade or business that is regularly carried on and is not substantially related to the organisation's exempt purpose.
For example, if a charity runs a commercial gift shop open to the general public, the profits from the shop might be considered UBI. An organisation generally must file Form 990-T once its gross income from unrelated business activities reaches a modest threshold set by the IRS, so check the current figure each year.
If the form is not filed when required, the organisation could face penalties and interest, and in serious cases its tax-exempt status could be put at risk. The form lists the gross unrelated income, subtracts the expenses directly connected with earning it plus a small specific deduction, and calculates the tax due on what remains.
It also gives the IRS data to judge how commercial an organisation's activities have become, which helps it assess whether tax-exempt status is still appropriate. Common sources of UBI include advertising sales, public cafes, paid car parks and equipment hire.
Donations, grants and most passive income, such as interest, dividends and rent from real property, are generally excluded. Think of Form 990-T as a way for charities to pay their fair share of tax on side jobs that do not fit their main work.
It works much like a person paying tax on freelance income earned on top of a regular job.
In practice
Real-world examples
Example 1
A local animal shelter, a tax-exempt entity, sells a line of general gift items online that have no link to animal welfare and earns $5,000 from it. Since this income is unrelated to its primary mission, the shelter files Form 990-T to report it and pay tax on the net amount. Its donation income is not included.
Example 2
A church runs a paid public car park on weekdays, charging commuters a daily fee, and earns $3,000 annually. Because this commercial activity does not relate to the church's religious purpose, it files Form 990-T to report the unrelated business income. The church keeps a log of the costs of running the car park to claim as direct expenses.
Example 3
A non-profit educational foundation runs a coffee shop inside its premises that is open to the general public. The shop generates $10,000 in profits, which are unrelated to its educational mission, requiring the foundation to file Form 990-T. If the shop were staffed entirely by volunteers, a different exclusion might apply, so the foundation checks with its adviser.
Think of it
Think of Form 990-T as a way for charities to pay their fair share of taxes on side jobs that don't fit their main work, much like how a person might pay taxes on freelance work on top of their regular job.
Formula
Calculation
Unrelated Business Taxable Income (UBTI) = Gross Unrelated Income - Directly Connected Expenses - Specific Deduction
Tax Due = UBTI x Applicable Tax Rate
The applicable rate is set by law and depends on the type of organisation, so the example below uses an assumed illustrative rate of 20%.
Example: A charity's public cafe earns $12,000 of gross income. Directly connected expenses (ingredients, wages for cafe staff) are $7,000, and the specific deduction is $1,000.
UBTI = $12,000 - $7,000 - $1,000 = $4,000.
Tax Due = $4,000 x 0.20 = $800.
Only the $4,000 of net unrelated income is taxed; the charity's donations and grants are untouched.Case study
Seen in the real world
This is a fictional, illustrative scenario. GreenLeaf, a non-profit focused on environmental education, operates a cafe open to the public. In one year, the cafe earns $12,000 in gross income, with $7,000 of directly connected costs. Since this income isn't part of GreenLeaf's primary purpose, the organisation needs to report it using Form 990-T. The accountant calculates the unrelated business taxable income as $12,000 - $7,000 - $1,000 = $4,000, then applies the rate that applies to the organisation to work out the tax due.
Using an assumed rate of 20%, that would be $800. The treasurer was relieved to learn that the tax applied to the $4,000 of net cafe income, not to GreenLeaf's grants or donations. By filing Form 990-T, GreenLeaf transparently reports its income, ensures it meets legal obligations and avoids potential penalties. The board also decided to review each year whether the cafe's profits justify the extra paperwork and the risk of the cafe growing too large relative to the charity's mission.
Watch out
Common mistakes
- Failing to file Form 990-T when gross unrelated business income reaches the IRS filing threshold, even if the activity made little or no profit.
- Confusing unrelated business income with donations or grants, which are not taxed as UBI.
- Assuming all income is exempt from taxes because the organisation is tax-exempt, when only income related to its mission is protected.
Questions
People also ask
Who needs to file Form 990-T?
Tax-exempt organisations whose gross unrelated business income reaches the IRS filing threshold in the tax year must file Form 990-T.
What happens if an organisation doesn't file Form 990-T?
The organisation may face penalties and interest, and repeated failures could risk its tax-exempt status.
Can donations be considered unrelated business income?
No, donations and grants are not considered unrelated business income.