What Churches Need to Know About UBIT

What Churches Need to Know About Unrelated Business Income Tax (UBIT)

Churches and tax-exempt organizations can generate income outside of their primary mission. While this is permitted, it can create tax implications—specifically related to Unrelated Business Income Tax (UBIT).

Understanding when UBIT applies, and how it is calculated, is essential for maintaining compliance and avoiding unexpected tax obligations.

What Is UBIT?

Unrelated Business Income Tax (UBIT) applies to income generated from activities that are not substantially related to an organization’s exempt purpose.

Churches and religious organizations may engage in income-producing activities, but when those activities fall outside their primary mission, the net income from those activities may be subject to taxation.

Net income, in this context, refers to the profit earned after deducting allowable expenses directly connected to the activity.

When Is Income Subject to UBIT?

Income is generally subject to UBIT when all three of the following conditions are met:

• The activity constitutes a trade or business

• The activity is regularly carried on

• The activity is not substantially related to the organization’s exempt purpose

It’s important to note that using the income to support a church’s mission does not make the activity itself related to that mission.

Exceptions to UBIT

Even if an activity meets the criteria above, certain exceptions may apply. Income may not be subject to UBIT if:

• Substantially all the work is performed by volunteers

• The activity is conducted primarily for the convenience of members

• The merchandise being sold was substantially all donated

In addition, certain types of income—such as rents from real property, royalties, capital gains, interest, and dividends—are generally excluded, unless the income is generated from debt-financed property.

Common Examples of Unrelated Business Activities

Advertising

Income from selling advertising space—whether in bulletins, publications, or on a church website—is generally considered unrelated business income.

Sale of Merchandise and Publications

Selling items that do not have a direct relationship to the church’s exempt purpose may be considered an unrelated trade or business activity.

Rental Income

Rental income is generally excluded from UBIT. However, exceptions apply:

• If the property is debt-financed, income may be taxable

• If services are provided alongside the rental, income may be taxable

Parking Lots

• Fees collected from members attending services are generally not taxable

• Fees collected from the general public are typically subject to UBIT

• Leasing the parking lot to a third party may result in non-taxable rental income

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Filing Requirements

If a church or exempt organization generates $1,000 or more in gross income from unrelated business activities, it must file IRS Form 990-T.

If the organization operates under a larger entity but has its own EIN, it must file separately.

Form 990-T is due on the 15th day of the 5th month following the end of the organization’s tax year.

Final Considerations

Whether an activity is considered unrelated depends on the specific facts and circumstances. Understanding how these rules apply is essential for maintaining compliance while continuing to support the organization’s mission.

For additional guidance, refer to IRS Publication 598.

Closing

If your church is generating income outside of its primary mission and you’re unsure how UBIT applies, this is where clarity matters