what is unrelated business taxable income ubti 
unrelated business taxable income ubti is income earned by a tax exempt entity that s not related to the tax exempt purpose of the entity more precisely the internal revenue service irs defines unrelated business taxable income for most organizations as income from a trade or business regularly carried on that is not substantially related to the charitable educational or other purpose that is the basis of the organization s exemption 1understanding unrelated business taxable income ubti the internal revenue code irc section 501 grants tax exempt status to a variety of tax exempt and mutually beneficial organizations however a tax exempt entity such as a nonprofit or educational organization may be liable for tax if it engages in and derives income from unrelated business activities 2ubti was introduced in 1950 to ensure that tax exempt businesses compete fairly with taxable companies in profit generating activities ubti also prevents or limits tax exempt entities from engaging in businesses that are unrelated to their primary purposes 3most forms of passive income such as dividends interest income and capital gains from the sale or exchange of capital assets are not treated as ubti 4 for example if an investor holds an individual retirement account ira that invests in traditional equities mutual funds and etfs the ubti rules will most likely not apply however if an investment for example a mutual fund generates income that qualifies as ubti the fund may be subject to taxation 4 for example income from a restaurant business that flows into an ira is considered taxable that s because the business activity doesn t relate to the tax exempt purpose of providing a pension to the ira holder activities that generate ubtian activity is considered unrelated business and the income generated taxable if it meets the following thresholds as defined by the irs 5irs publication 598 provides more information about unrelated business activities and these three categories 4some transactions that may be considered unrelated business activity include organizations must make estimated tax payments if they expect annual unrelated business income tax to be 500 or more estimated tax payments are normally due on the 15th day of the 4th 6th 9th and 12th months of the tax year and must total 100 of the organization s total tax liability for that year 4the irs excludes these activities from the definition of unrelated trade or business 6taxes on ubtiany exempt organization subject to the tax on unrelated business income is taxable at corporate rates a federal rate of 21 on gross income beyond 1 000 7 the same applies to exempt trusts except that income is taxed at trust rates federal rates from 10 to 37 8according to the irs the tax computed on the total ubti can be reduced by any applicable tax credits including general business credits such as the investment credit and foreign tax credits however an exempt trust may not claim the deduction for a personal exemption that a trust normally can claim 4to pay the tax exempt organizations must file irs form 990 t 4certain income is excluded from the unrelated business taxable income that an exempt organization may have to pay taxes on 4irs publication 598 provides more information about income that s excluded from ubti 