Determine which activities generate UBI

Let’s begin by defining UBI. If your 501(c)(3) generates income through “unrelated” activities, such as fundraising, some of that income may be taxable. This tax is called “unrelated business income tax,” or UBI tax.

UBI is income from a regularly-carried-on trade or business that is not substantially related to the organization’s exempt purpose.

To find out if an activity of your 501(c)(3) generates UBI, conduct the UBI test.

With this three-part test, you’ll determine whether the activity is:

1. A trade or business
2. Regularly carried on
3. Not substantially related

Let’s take a closer look at each part of the UBI test.