unrelated business income tax
Reviewed by Owen Hathaway, AttorneyUpdated September 18, 2026The tax a nonprofit pays on income from a regular trade or business unrelated to its exempt mission. It is the rule that keeps tax-exempt orgs from unfairly competing with taxable businesses.
Unrelated business income tax (UBIT) is the federal tax a tax-exempt organization owes on net income from a trade or business it regularly carries on that is not substantially related to its exempt purpose. It prevents nonprofits from using tax exemption to compete unfairly with for-profit businesses.
Income tied to the mission, and certain passive income like many forms of investment return, is generally not subject to UBIT. Too much unrelated business activity can also threaten the organization's exempt status, so it must be monitored.
UBIT is federal (26 U.S.C. §§ 511–514), reported on IRS Form 990-T, and applies the same to Colorado and Wyoming nonprofits. Reflecting the no margin, no mission reality, many nonprofits do pursue earned revenue; they simply must manage the UBIT consequences.
Related terms
- 501(c)(3)The federal tax status for charitable nonprofits. These entities are exempt from income tax, and sometimes certain state-level taxes, and are able to receive tax-deductible donations, in exchange for strict limits on their activities.
- Form 990The annual information return most tax-exempt organizations file with the IRS. It's public, so it doubles as a transparency and accountability document.