What is the applicable tax treatment for unrelated business taxable income (UBTI) ?
Unrelated business taxable income (UBTI) is subject to federal income tax for organizations otherwise exempt under section 501(a).
Key Tax Treatment Rules
General Computation
UBTI consists of gross income from unrelated trades or businesses, less allowable deductions directly connected to that business. Organizations must:
- Include income from trades or businesses regularly carried on that are not substantially related to their exempt purpose
- Deduct only expenses with a proximate and primary relationship to the unrelated business
- Apply the specific deduction and modifications for net operating losses (NOL) and charitable contributions
Partnership and S Corporation Income
Partnership interests: Organizations must include their distributive share of partnership gross income from unrelated trades or businesses and related deductions, whether or not distributed. This information is reported on Schedule K-1.
S corporation stock: Organizations must include their share of all S corporation income, deductions, and losses in UBTI calculations, regardless of the actual source or nature. Even normally excluded items like interest and dividends become taxable when flowing through an S corporation.