Generally, income derived from the rental of real property and incidental personal property is not subject to UBIT unless there is an outstanding debt on the property at issue (such as a mortgage note). Take as another example an exempt organization that regularly rents out its hall to be used for weddings.
Rental income from real property received by exempt organizations is normally excluded from unrelated business taxable income (UBTI).
Are churches subject to UBIT?
Although most tax-exempt organizations must file an annual information return (form 990) with the IRS, churches are explicitly excluded from this requirement by IRC section 6033. Still, they may have some potential reporting and taxation obligations, such as unrelated business income taxes (UBIT) and employment taxes.
What is UBIT for a church?
Many churches operate coffeehouses, bookstores, and other small businesses that attract guests and serve the needs of members. UBIT subjects churches to taxation on business activities not substantially related to their tax-exempt purpose.
Is the rental income of a church subject to UBIT?
In general, rental income received by a church is not subject to UBIT so long as the property that is rented is not subject to any indebtedness.
Do you have to pay tax on rental of church property?
Many churches rent a portion of their property to outside groups. Is rental income generated by such arrangements subject to the unrelated business income tax (UBIT)? We have addressed this question in a number of articles in this newsletter.
What kind of income can be excluded from UBIT?
The types of income that are excluded include dividend and interest income, royalties, and rents from real property. If an organization does conduct an unrelated trade or business, they are allowed to take certain deductions that are directly connected to the activity when computing unrelated business taxable income.
When does a nonprofit organization have a UBIT?
UBIT: When a Nonprofit Is Profitable. Often, when people think of a nonprofit organization they automatically assume it is tax exempt; however, that is not always the case. Certain exempt nonprofit organizations are liable for tax if they have unrelated business taxable income, which is discussed in detail below.
