A client, a tax-exempt organization, operates a small convenience store on its premises, selling snacks and beverages to visitors. The store is open to the public during the organization's regular operating hours. The net income from the store is $50,000 for the current year. The organization's primary exempt purpose is providing educational services. Is the income from the convenience store subject to Unrelated Business Income Tax (UBIT)?
- ANo, because the store is operated by a tax-exempt organization.
- BNo, because the store's income is less than $1,000.
- CYes, because all income of a tax-exempt organization is subject to UBIT if it exceeds $10,000.
- DYes, because it is a trade or business regularly carried on and not substantially related to the organization's exempt purpose.
Show answer & explanationAnswer & explanation
Correct answer: D. Yes, because it is a trade or business regularly carried on and not substantially related to the organization's exempt purpose.
Income from a trade or business that is regularly carried on and not substantially related to the organization's exempt purpose is generally subject to UBIT. Selling snacks and beverages in a convenience store is typically not substantially related to providing educational services, making it an unrelated trade or business. The $1,000 specific deduction does not exempt the entire activity from UBIT.
Why the other options are wrong
- A. Operating as a tax-exempt organization does not automatically exempt all income from UBIT.
- B. There is a $1,000 specific deduction, but that does not exempt the entire activity if it meets the UBIT criteria.
- C. The $10,000 threshold is not a UBIT rule; the $1,000 specific deduction applies after UBI is determined.
Unrelated Business Income Tax (UBIT)
UBIT is a tax on the net income of an unrelated trade or business regularly carried on by an otherwise tax-exempt organization. An unrelated trade or business is one not substantially related to the performance of the organization's exempt purpose.
- Applies to income from an unrelated trade or business.
- Business must be regularly carried on.
- Must not be substantially related to the exempt purpose.
- Subject to a $1,000 specific deduction.
Memory trick: UBIT: Unrelated, Business, Regularly!