Contents

Introduction .................. 2

Chapter 1. Organizations Subject 

to the Tax ................. 2

Chapter 2. The Tax and Filing 

Requirements .............. 3

Chapter 3. Unrelated Trade 

or Business ............... 4

Chapter 4. Unrelated Business 

Taxable Income ............. 9

Chapter 5. How To Get Tax Help .... 21

Index ..................... 22

Future Developments

The IRS has created a page on IRS.gov for 

information about Pub. 598, at IRS.gov/Pub598. 

Information about any future developments 

affecting Pub. 598 (such as legislation enacted 

after we release it) will be posted on that page.

What's New

• Mandatory electronic filing. Section 3101 

of the Taxpayer First Act, (P.L. 116-25) 

requires tax-exempt organizations to 

electronically file information returns and 

related forms. This law affects tax-exempt 

organizations in tax years beginning after 

July 1, 2019. In 2020, the IRS continued to 

accept paper Forms 990-T pending 

conversion into electronic format. In 2021, 

the Form 990-T is being updated and 

e-filing is required for tax year 2020 filings. 

The IRS expects e-filing to be available 

beginning in February 2021. The IRS will 

announce the specific dates when the 

programming comes online. See the 

Instructions for Form 990-T, When, Where, 

and How To File, for more information.

• Final regulations issued. Section 512(a)(6) 

requires a tax-exempt organization with 

more than one unrelated trade or business 

to compute unrelated business taxable 

income (UBTI), including any NOL 

deduction, separately for each trade or 

business. Final regulations were published 

in the Federal Register on December 2, 

2020, that provide guidance on how an 

exempt organization determines if it has 

more than one unrelated trade or business, 

and, if so, how the exempt organization 

calculates unrelated business taxable 

income. T.D. 9933, 85 Fed. Reg. 77952 

(Dec. 2, 2020). The final regulations are 

applicable to tax years beginning on or 

after December 2, 2020. In addition, an 

exempt organization may choose to apply 

the final regulations under section 512(a)

(6) to tax years beginning on or after 

January 1, 2018, and before December 2, 

2020. Alternatively, an exempt 

Department 

of the 

Treasury

Internal 

Revenue 

Service

Publication 598

(Rev. March 2021)

Cat. No. 46598X

Tax on 

Unrelated 

Business Income 

of Exempt 

Organizations

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Mar 22, 2021
organization may rely on a reasonable, 

good-faith interpretation of section 512(a)

(6) for such tax years. For this purpose, a 

reasonable good faith interpretation 

includes the methods of aggregating or 

identifying separate trades or businesses 

provided in Notice 2018-67 or the 

proposed regulations published April 24, 

2020 (85 Fed. Reg. 23172). See T.D. 9933 

for more details.

• Form 990-T has been redesigned for tax 

year 2020. Schedule M (Form 990-T) has 

been replaced with Schedule A. Each 

unrelated trade or business of an 

organization is reported on a separate 

Schedule A. At the organization’s 

discretion, each separate trade or 

business may be classified by a 2-digit 

North American Industrial Classification 

System (NAICS) code. See Regulations 

section 1.512(a)-6(b)(1). The Instructions 

for Form 990-T provide 6-digit Business 

Activity Codes for investment and other 

activities not represented in NAICS.

• Organizations with more than one 

unrelated trade or business must compute 

unrelated business taxable income (UBTI), 

including for the purpose of determining 

any net operating loss deduction, 

separately with respect to each such trade 

or business. See Regulations section 

1.512(a)-6 for more information.

• Retroactive repeal of section 512(a)(7). 

P.L. 116-94 retroactively repealed the 

section 512(a)(7), which required exempt 

organizations to increase their unrelated 

business taxable income for expenses 

incurred to provide certain benefits, 

including qualified transportation fringes. If 

your organization reported and paid tax on 

such amounts included in unrelated 

business taxable income for tax years 

2017 or 2018 and you want to claim a 

refund, file an amended Form 990-T.

• Net operating loss (NOL) carryback. The 

Coronavirus Aid, Relief, and Economic 

Security Act (CARES Act) amended 

section 172 provides for carryback of any 

net operating loss arising in a tax year 

beginning after 2017 and before 2021 to 

each of the 5 tax years preceding the tax 

year of the NOL. Taxpayers may elect to 

waive the carryback period for NOLs 

arising in those years. To elect to waive the 

carryback period for an NOL arising in a 

tax year beginning in 2018 or 2019, attach 

a statement electing the carryback waiver 

to your return for the first tax year ending 

after March 27, 2020. For more 

information, see Rev. Proc. 2020-24. If you 

incurred an NOL in a tax year beginning in 

2018 or 2019, you can file an amended 

return, Form 990-T, to carryback the NOL. 

See Pub. 536 for more information.

• The maximum cost of a low-cost article, for 

organizations eligible to receive charitable 

contributions, was increased to $11.20 for 

2020. See Distribution of low-cost articles, 

later.

• The annual limit on associate member 

dues received by an agricultural or 

horticultural organization not treated as 

gross income was increased to $171 for 

2020. See Exception under Dues of 

Agricultural Organizations and Business 

Leagues, later.

Introduction

An exempt organization isn’t taxed on its income from an activity substantially related to 

the charitable, educational, or other purpose 

that is the basis for the organization's exemption. Such income is exempt even if the activity 

is a trade or business.

However, if an exempt organization regularly carries on one or more trades or businesses not substantially related to the organization's exempt purpose, except that conducting 

the trade or business provides funds to carry 

out the exempt purpose, the organization is 

subject to tax on its income from the unrelated 

trade(s) or business(es).

This publication covers the rules for the tax 

on unrelated business income of exempt organizations. It explains:

1. Which organizations are subject to the tax 

(chapter 1),

2. What the requirements are for filing a tax 

return (chapter 2),

3. What an unrelated trade or business is 

(chapter 3), and

4. How to figure unrelated business taxable 

income (chapter 4).

All section references in this publication are 

to the Internal Revenue Code.

Useful Items

You may want to see:

Publication

Tax-Exempt Status for Your 

Organization

Form (and Instructions)

Exempt Organization Business 

Income Tax Return

cdu() Unrelated Business 

Taxable Income From an Unrelated 

Trade or Business

Visit IRS.gov/FormsPubs to download forms 

and publications. Otherwise, you can go to 

IRS.gov/OrderForms to order current and 

prior-year forms and instructions. Your order 

should arrive within 10 business days.

Comments and suggestions. We welcome 

your comments about this publication and your 

suggestions for future editions.

You can send us comments through 

IRS.gov/FormComments. Or you can write to:

Internal Revenue Service

Tax Forms and Publications

1111 Constitution Ave. NW, IR-6526

Washington, DC 20224

Although we can’t respond individually to 

each comment received, we do appreciate your 

feedback and will consider your comments as 

we revise our tax products.

Tax questions. If you have tax questions not 

answered by the publication, check IRS.gov 

 557 

 990-T 

 Schedule A (990-T) 

and How To Get Tax Help at the end of this 

publication.

1.

Organizations 

Subject to the 

Tax

The tax on unrelated business income applies 

to most organizations exempt from tax under 

section 501(a). These organizations include 

charitable, religious, scientific, and other organizations described in section 501(c), as well as 

employees' trusts forming part of pension, 

profit-sharing, and stock bonus plans described 

in section 401(a).

In addition, the following are subject to the tax 

on unrelated business income.

• Individual retirement arrangements (IRAs), 

including traditional IRAs, Roth IRAs, simplified employee pensions (SEP-IRAs), 

and savings incentive match plans for employees (SIMPLE IRAs).

• State and municipal colleges and universities.

• Qualified state tuition programs described 

in section 529.

• Qualified ABLE programs described in 

section 529A.

• Medical savings accounts (MSAs) described in section 220(d).

• Coverdell savings accounts described in 

section 530.

U.S. instrumentalities. A corporation that is a 

U.S. instrumentality described in section 501(c)

(1) isn’t subject to the tax on unrelated business 

income if the corporation is organized under an 

Act of Congress and, under the Act, is exempt 

from federal income taxes.

Colleges and universities. Colleges and universities that are agencies or instrumentalities 

of any government or any political subdivision 

of a government, or that are owned or operated 

by a government or political subdivision of a 

government, are subject to the tax on unrelated 

business income. As used here, the word “government” includes any foreign government (to 

the extent not contrary to a treaty) and all domestic governments (the United States and any 

of its possessions, any state, and the District of 

Columbia).

The tax is on the unrelated business income 

of both the universities and colleges themselves 

and on their wholly owned or controlled tax exempt subsidiary organizations. It is immaterial 

whether the business is conducted by the university or by a separately incorporated wholly 

owned or controlled subsidiary. If the business 

activity is unrelated, the income in both instances will be subject to the tax. If the primary 

Page 2 Chapter 1 Organizations Subject to the Tax
purpose of a wholly owned or controlled subsidiary is to operate or conduct any unrelated trade 

or business (other than holding title to property 

and collecting income from it), the subsidiary 

isn’t an exempt organization, and this rule 

doesn’t apply.

Title-holding corporations. When an exempt 

title-holding corporation, described in section 

501(c)(2), pays any of its net income to an organization that itself is exempt from tax under 

section 501(a) (or would pay such an amount 

except that the expenses of collecting its income exceed the amount collected) and files a 

consolidated return with that organization, the 

title-holding corporation is treated, for unrelated 

business income tax purposes, as organized 

and operated for the same purposes as the exempt payee organization.

Thus, a title-holding corporation whose 

source of income is related to the exempt purposes of the payee organization isn’t subject to 

the unrelated business income tax if the holding 

corporation and the payee organization file a 

consolidated return. However, if the source of 

the income isn’t so related, the title-holding corporation is subject to unrelated business income tax.

Example. X, a title-holding corporation, is 

required to distribute its net income to A, an exempt organization. During the tax year, X realizes net income of $900,000 from source M, 

which is related to A's exempt function. X also 

receives $100,000 from source N, which isn’t 

related to A's exempt function. X and A file a 

consolidated return for the tax year. X has unrelated business income of $100,000.

2.

The Tax and 

Filing 

Requirements

All organizations subject to the tax on unrelated 

business income, except the exempt trusts described in section 511(b)(2), are taxable at corporate rates on that income. All exempt trusts 

subject to the tax on unrelated business income 

that, if not exempt, would be taxable as trusts 

are taxable at trust rates on that income. However, an exempt trust may not claim the deduction for a personal exemption that is normally allowed to a trust.

The tax is imposed on the organization's unrelated business taxable income (UBTI) (described 

in chapter 4). Under section 512(a)(6), an organization that conducts more than one unrelated trade or business calculates its UBTI as the 

sum of the UBTI calculated separately for each 

unrelated trade or business, and when calculating this sum, the UBTI from any of the separate 

trades or businesses can't be less than zero. 

The tax computed on the total UBTI can be reduced by any applicable tax credits, including 

the general business credits (such as the investment credit) and the foreign tax credit.

Returns and Filing 

Requirements

Mandatory electronic filing of Form 990-T started in February 2021. Limited exceptions apply. 

See the Instructions for Form 990-T for more information. The obligation to file Form 990-T is in 

addition to the obligation to file any other required return or notice.

Form 990-T is required if the sum of the organization's gross income from all unrelated 

businesses is $1,000 or more. An exempt organization files a single Form 990-T. The organization reports the income and expenses for 

each of its unrelated businesses on a separate 

Schedule A (Form 990-T) attached to the Form 

990-T. See Regulations section 1.512(a)-6 for 

information about how to identify separate unrelated trades or businesses.

Each organization must file a separate Form 

990-T, except section 501(c)(2) title-holding 

corporations and organizations receiving their 

earnings that file a consolidated return under 

section 1501.

The various provisions of tax law relating to 

accounting periods, accounting methods, 

at-risk limits (described in section 465), assessments, and collection penalties that apply to tax 

returns also generally apply to Form 990-T.

When to file. The Form 990-T of an employees' trust described in section 401(a), an IRA 

(including a traditional, SEP, SIMPLE, Roth, or 

Coverdell IRA), or an MSA must be filed by the 

15th day of the 4th month after the end of its tax 

year. The Form 990-T of any other exempt organization must be filed by the 15th day of the 

5th month after the end of its tax year. If the due 

date falls on a Saturday, Sunday, or legal holiday, the return is due by the next business day.

Extension of time to file. Use Form 8868, 

Application for Automatic Extension of Time To 

File an Exempt Organization Return, to request 

an automatic 6-month extension of time to file 

Form 990-T.

Public Inspection Requirements of Section 

501(c)(3) Organizations. Under section 

6104(d), a section 501(c)(3) organization that 

has gross income from an unrelated trade or 

business of $1,000 or more must make its Form 

990-T return (including amended returns) available for public inspection. See the Instructions 

for Form 990-T for information about attachments and related forms that are disclosable as 

part of the return.

A section 501(c)(3) organization filing 

the Form 990-T only to request a credit 

for certain federal excise taxes paid 

doesn’t have to make the Form 990-T available 

for public inspection.

TIP

Payment of Tax

Estimated tax. A tax-exempt organization 

must make estimated tax payments if it anticipates its tax (unrelated business income tax after certain adjustments) to be $500 or more. Estimated tax payments are generally due by the 

15th day of the 4th, 6th, 9th, and 12th months of 

the tax year. If any due date falls on a Saturday, 

Sunday, or legal holiday, the payment is due on 

the next business day.

Any organization that fails to pay the proper 

estimated tax when due may be charged an underpayment penalty for the period of underpayment. Generally, to avoid the estimated tax penalty, the organization must make estimated tax 

payments that total 100% of the organization's 

current tax year liability. However, an organization with taxable income less than $1 million for 

each of the 3 preceding tax years can base its 

required estimated tax payments on 100% of 

the tax shown on its return for the preceding 

year (unless no tax is shown). If an organization's taxable income for any of those years was 

$1 million or more, it can base only its first required installment payment on its prior year's 

tax.

All tax-exempt organizations should use 

Form 990-W (Worksheet), to figure their estimated tax.

Tax due with Form 990-T. Any tax due with 

Form 990-T must be paid in full when the return 

is filed, but no later than the date the return is 

due (determined without extensions).

Federal Tax Deposits Must 

be Made by Electronic Funds 

Transfer

Electronic Deposit Requirement. The organization must deposit all depository taxes 

(such as employment tax, excise tax, and corporate income tax) electronically. Generally, 

electronic fund transfers are made using the 

Electronic Federal Tax Payment System 

(EFTPS). For more information about EFTPS or 

to enroll in EFTPS, visit the EFTPS website at 

EFTPS.gov, or call 1-800-555-4477, 

1-800-733-4829 (TDD), or 1-800-244-4829 

(Spanish). You can also get Pub. 966, Electronic Federal Tax Payment System: A Guide to 

Getting Started.

Depositing on time. For EFTPS deposits to 

be made timely, the organization must initiate 

the deposit by 8 p.m. Eastern time the day before the deposit is due.

Same-day wire payment option. If you fail to 

initiate a deposit transaction on EFTPS by 8 

p.m. Eastern time the day before the date a deposit is due, you can still make your deposit on 

time by using the Federal Tax Application 

(FTA), a same-day federal tax payment system 

that works in conjunction with EFTPS. Make arrangements with your financial institution ahead 

of time, noting the institution's availability, deadlines, and costs, if you believe you would ever 

need the same-day wire payment option. To 

learn more, visit IRS.gov/SameDayWire and 

Chapter 2 The Tax and Filing Requirements Page 3
also download the Same-Day Payment Worksheet.

Timeliness of deposits. The IRS uses business days to determine the timeliness of deposits. Business days are any day that isn't a Saturday, Sunday, or legal holiday in the District of 

Columbia. See Pub. 583, Starting a Business 

and Keeping Records.

If the organization owes tax and is filing 

a paper Form 990-T, don't include the 

payment with the tax return. Instead, 

use EFTPS.

3.

Unrelated Trade 

or Business

Unrelated business income is the income from 

a trade or business regularly conducted by an 

exempt organization and not substantially related to the performance by the organization of its 

exempt purpose or function. Use by the organization, of the profits derived from this activity, 

does not, alone, make the activity substantially 

related to the performance by the organization 

of its exempt purpose or function.

Certain trade or business activities aren’t treated as an unrelated trade or business. See Excluded Trade or Business Activities, later.

Trade or business. The term “trade or business” generally includes any activity conducted 

for the production of income from selling goods 

or performing services. An activity must be conducted with intent to make a profit to constitute 

a trade or business. An activity doesn’t lose its 

identity as a trade or business merely because 

it is conducted within a larger group of similar 

activities that may or may not be related to the 

exempt purposes of the organization.

For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy doesn’t lose its identity as a 

trade or business, even though the pharmacy 

also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. Similarly, soliciting, selling, and 

publishing commercial advertising is a trade or 

business even though the advertising is published in an exempt organization's periodical 

that contains editorial matter related to the organization's exempt purpose.

Regularly conducted. Business activities of 

an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a 

manner similar to comparable commercial activities of nonexempt organizations.

For example, a hospital auxiliary's operation 

of a sandwich stand for 2 weeks at a state fair 

would not be the regular conduct of a trade or 

CAUTION

!

business. The stand would not compete with 

similar facilities that a nonexempt organization 

would ordinarily operate year-round. However, 

operating a commercial parking lot every Saturday, year-round, would be the regular conduct 

of a trade or business.

Not substantially related. A business activity 

isn’t substantially related to an organization's 

exempt purpose if it doesn’t contribute importantly to accomplishing that purpose (other than 

through the production of funds). Whether an 

activity contributes importantly depends in each 

case on the facts involved.

In determining whether activities contribute 

importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to 

the nature and extent of the exempt function 

that they intend to serve. For example, to the 

extent an activity is conducted on a scale larger 

than is reasonably necessary to perform an exempt purpose, it doesn’t contribute importantly 

to the accomplishment of the exempt purpose. 

The part of the activity that is more than needed 

to accomplish the exempt purpose is an unrelated trade or business.

Also in determining whether activities contribute importantly to the accomplishment of an 

exempt purpose, the following principles apply.

Selling of products of exempt functions.

Ordinarily, selling products that result from the 

performance of exempt functions isn’t an unrelated trade or business if the product is sold in 

substantially the same state it is in when the exempt functions are completed. Thus, for an exempt organization engaged in rehabilitating 

handicapped persons (its exempt function), 

selling articles made by these persons as part 

of their rehabilitation training is not an unrelated 

trade or business.

However, if a completed product resulting 

from an exempt function is used or exploited in 

further business activity beyond what is reasonably appropriate or necessary to dispose of it as 

is, the activity is an unrelated trade or business. 

For example, if an exempt organization maintains an experimental dairy herd for scientific 

purposes, the sale of milk and cream produced 

in the ordinary course of operation of the project 

isn’t an unrelated trade or business. But if the 

organization uses the milk and cream in the further manufacture of food items such as ice 

cream, pastries, etc., the sale of these products 

is an unrelated trade or business unless the 

manufacturing activities themselves contribute 

importantly to the accomplishment of an exempt purpose of the organization.

Dual use of assets or facilities. If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions doesn’t, by 

itself, make the commercial activities a related 

trade or business. The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes.

For example, a museum has a theater auditorium designed for showing educational films 

in connection with its program of public education in the arts and sciences. The theater is a 

principal feature of the museum and operates 

continuously while the museum is open to the 

public. If the organization also operates the theater as a motion picture theater for the public 

when the museum is closed, the activity is an 

unrelated trade or business.

For information on allocating expenses for 

the dual use of assets or facilities, see Deductions in chapter 4.

Exploitation of exempt functions. Exempt activities sometimes create goodwill or 

other intangibles that can be exploited in a commercial way. When an organization exploits 

such an intangible in commercial activities, the 

fact that the income depends in part upon an 

exempt function of the organization doesn’t 

make the commercial activities a related trade 

or business. Unless the commercial exploitation 

contributes importantly to the accomplishment 

of the exempt purpose, the commercial activities are an unrelated trade or business.

For the treatment of expenses attributable to 

the exploitation of exempt activities, see Deductions in chapter 4.

Examples

The following are examples of activities that 

were determined to be (or not to be) unrelated 

trades or businesses using the definitions and 

principles just discussed.

Artists' facilities. An organization whose exempt purpose is to stimulate and foster public 

interest in the fine arts by promoting art exhibits, 

sponsoring cultural events, and furnishing information about fine arts leases studio apartments 

to artist tenants and operates a dining hall primarily for these tenants. These two activities 

don’t contribute importantly to accomplishing 

the organization's exempt purpose. Therefore, 

they are unrelated trades or businesses.

Broadcasting rights. An exempt collegiate 

athletic conference conducts an annual competitive athletic game between its conference 

champion and another collegiate team. Income 

is derived from admission charges and the sale 

of exclusive broadcasting rights to a national radio and television network. An athletic program 

is considered an integral part of the educational 

process of a university.

The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by 

their regional athletic conference. Also, the educational purposes served by exhibiting a game 

before an audience that is physically present 

and exhibiting the game on television or radio 

before a much larger audience are substantially 

similar. Therefore, the sale of the broadcasting 

rights contributes importantly to the accomplishment of the organization's exempt purpose and 

isn’t an unrelated trade or business.

In a similar situation, an exempt organization 

was created as a national governing body for 

amateur athletes to foster interest in amateur 

sports and to encourage widespread public participation. The organization receives income 

each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast 

many of the athletic events sponsored, supervised, and regulated by the organization.

Page 4 Chapter 3 Unrelated Trade or Business
The broadcasting of these events promotes 

the various amateur sports, fosters widespread 

public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. The sale of the rights 

and the broadcasting of the events contribute 

importantly to the organization's exempt purpose. Therefore, the sale of the exclusive 

broadcasting rights isn’t an unrelated trade or 

business.

Business league's parking and bus services. The exempt purpose of a business league is to retain and stimulate trade in a downtown area that has inadequate parking facilities. 

The organization operates, as an insubstantial 

part of its activities, a park-and-shop plan.

The park-and-shop plan allows customers of 

particular merchants to park free at certain 

parking lots in the area. Merchants participating 

in this plan buy parking stamps, which they distribute to their customers to use to pay for parking.

The park-and-shop plan encourages customers to use a limited number of participating 

member merchants in order to obtain free parking. This provides a particular service to individual members of the organization and doesn’t 

further its exempt purpose. Therefore, operating 

the park-and-shop plan is an unrelated trade or 

business.

Halfway house workshop. A halfway house 

organized to provide room, board, therapy, and 

counseling for persons discharged from alcoholic treatment centers also operates a furniture 

shop to provide full-time employment for its residents. The profits are applied to the operating 

costs of the halfway house. The income from 

this venture isn’t unrelated trade or business income because the furniture shop contributes 

importantly to the organization's purpose of aiding its residents' transition from treatment to a 

normal and productive life.

Health club program. An exempt charitable 

organization's purpose is to provide for the welfare of young people. The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, 

mental, and spiritual health of young people at 

minimum or no cost to them. Nominal annual 

dues are charged for membership in the organization and use of the facilities.

In addition, the organization organized a 

health club program that its members could join 

for an annual fee in addition to the annual dues. 

The annual fee is comparable to fees charged 

by similar local commercial health clubs and is 

sufficiently high to restrict participation in the 

program to a limited number of members of the 

community.

The health club program is in addition to the 

general physical fitness program of the organization. Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is 

an unrelated trade or business if there is a intent to make a profit.

Hospital facilities. An exempt hospital leases 

its adjacent office building and furnishes certain 

office services to a hospital-based medical 

group for a fee. The group provides all diagnostic and therapeutic procedures to the hospital's 

patients and operates the hospital's emergency 

room on a 24-hour basis. The leasing activity is 

substantially related to the hospital's exempt 

purpose and isn’t an unrelated trade or business.

The hospital also operates a gift shop 

patronized by patients, visitors making purchases for patients, and employees; a cafeteria 

and coffee shop primarily for employees and 

medical staff; and a parking lot for patients and 

visitors only. These activities are substantially 

related to the hospital's exempt purpose and 

don’t constitute unrelated trades or businesses.

Insurance programs. An organization that 

acts as a group insurance policyholder for its 

members and collects a fee for performing administrative services is normally carrying on an 

unrelated trade or business.

Exceptions. Administrative services provided by an organization whose exempt activities 

may include the provision of insurance benefits, 

such as fraternal beneficiary societies, voluntary employees beneficiary associations, and 

labor organizations, are generally not an unrelated trade or business.

Magazine publishing. An association of credit 

unions with tax-exempt status as a business 

league publishes a consumer-oriented magazine four times a year and makes it available to 

member credit unions for purchase.

By selling a magazine to its members as a 

promotional device, the organization furnishes 

its members with a regular commercial service 

they can use in their own operations. This service doesn’t promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a 

business league.

Since the activity doesn’t contribute importantly to the organization's exempt function, it is 

an unrelated trade or business.

Membership list sales. An exempt educational organization regularly sells membership 

mailing lists to business firms. This activity 

doesn’t contribute importantly to the accomplishment of the organization's exempt purpose 

and therefore is an unrelated trade or business. 

Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later.

Miniature golf course. An exempt youth welfare organization operates a miniature golf 

course that is open to the general public. The 

course, which is managed by salaried employees, is substantially similar to commercial courses. The admission fees charged are comparable to fees of commercial facilities and are 

designed to return a profit.

The operation of the miniature golf course in 

a commercial manner doesn’t contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business.

Museum eating facilities. An exempt art museum operates a dining room, a cafeteria, and a 

snack bar for use by the museum staff, employees, and visitors. Eating facilities in the museum 

help to attract visitors and allow them to spend 

more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. The eating facilities also allow the museum staff and employees to remain in the 

museum throughout the day. Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its 

exempt purposes and isn’t an unrelated trade or 

business.

Museum greeting card sales. An art museum that exhibits modern art sells greeting 

cards that display printed reproductions of selected works from other art collections. Each 

card is imprinted with the name of the artist, the 

title or subject matter of the work, the date or 

period of its creation, if known, and the museum's name. The cards contain appropriate 

greetings and are personalized on request.

The organization sells the cards in the shop 

it operates in the museum and sells them at 

quantity discounts to retail stores. The museum 

also sells greeting cards by mail order through a 

catalog that is advertised in magazines and 

other publications throughout the year. As a result, a large number of cards are sold at a significant profit.

The museum is exempt as an educational 

organization on the basis of its ownership, 

maintenance, and exhibition for public viewing 

of works of art. The sale of greeting cards with 

printed reproductions of artworks contributes 

importantly to the achievement of the museum's 

exempt educational purposes by enhancing 

public awareness, interest, and appreciation of 

art. The cards may encourage more people to 

visit the museum itself to share in its educational programs. The fact that the cards are promoted and sold in a commercial manner at a 

profit and in competition with commercial greeting card publishers doesn’t alter the fact that the 

activity is related to the museum's exempt purpose. Therefore, these sales activities aren’t an 

unrelated trade or business.

Museum shop. An art museum maintained 

and operated for the exhibition of American folk 

art operates a shop in the museum that sells:

1. Reproductions of works in the museum's 

own collection and reproductions of artistic works from the collections of other art 

museums (prints suitable for framing, 

postcards, greeting cards, and slides);

2. Metal, wood, and ceramic copies of American folk art objects from its own collection 

and similar copies of art objects from other 

collections of artworks;

3. Instructional literature and scientific books 

and souvenir items concerning the history 

and development of art and, in particular, 

of American folk art; and

4. Scientific books and souvenir items of the 

city in which the museum is located.

The shop also rents originals or reproductions of paintings contained in its collection. All 

of its reproductions are imprinted with the name 

of the artist, the title or subject matter of the 

work from which it is reproduced, and the museum's name.

Chapter 3 Unrelated Trade or Business Page 5
Each line of merchandise must be considered separately to determine if sales are related 

to the exempt purpose.

The sale and rental of reproductions and 

copies of works from the museum's own collection and reproductions of artistic works not 

owned by the museum contribute importantly to 

the achievement of the museum's exempt educational purpose by making works of art familiar 

to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. The same is true for the sale of literature relating to art. Therefore, these sales 

activities aren’t an unrelated trade or business.

On the other hand, the sale (if they intend to 

make a profit) of scientific books and souvenir 

items of the city where the museum is located 

has no causal relationship to art or to artistic endeavor and, therefore, doesn’t contribute importantly to the accomplishment of the museum's 

exempt educational purposes. Even though 

selling some of these items could, in a different 

context, be related to the exempt educational 

purpose of a different exempt educational organization doesn’t change this conclusion. Additionally, the sale of these items doesn’t lose 

its character as an unrelated trade or business 

merely because the museum also sells articles 

that contribute importantly to the accomplishment of its exempt function. Therefore, these 

sales by the museum in this example are an unrelated trade or business.

Nonpatient laboratory testing. Nonpatient 

laboratory testing performed by a tax-exempt 

teaching hospital on specimens needed for the 

conduct of its teaching activities isn’t an unrelated trade or business. However, laboratory testing performed by a tax-exempt non-teaching 

hospital on referred specimens from private office patients of staff physicians is an unrelated 

trade or business if these services are otherwise available in the community.

Pet boarding and grooming services. An 

exempt organization, organized and operated 

for the prevention of cruelty to animals, receives 

unrelated business income from providing pet 

boarding and grooming services for the general 

public. These activities don’t contribute importantly to its purpose of preventing cruelty to animals.

Publishing legal notices. A bar association 

publishes a legal journal containing opinions of 

the county court, articles of professional interest 

to lawyers, advertisements for products and 

services used by the legal profession, and legal 

notices. The legal notices are published to satisfy state laws requiring publication of notices in 

connection with legal proceedings, such as the 

administration of estates and actions to quiet title to real property. The state designated the 

bar association's journal as the place to publish 

the required notices.

The publication of ordinary commercial advertising doesn’t advance the exempt purposes 

of the association even when published in a periodical that contains material related to exempt 

purposes. Although the advertising is directed 

specifically to members of the legal profession, 

it is still commercial in nature and doesn’t contribute importantly to the exempt purposes of 

the association. Therefore, the advertising income is unrelated trade or business income.

On the other hand, the publication of legal 

notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal 

events rather than to stimulate demand for the 

products or services of an advertiser. This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. Therefore, the 

publishing of legal notices doesn’t constitute an 

unrelated trade or business.

Directory of members. A business league 

publishes an annual directory that contains a list 

of all its members, their addresses, and their 

area of expertise. Each member has the same 

amount of space in the directory, and its format 

doesn’t emphasize the relative importance or 

reputation of any member. The directory contains no commercial advertisement and is sold 

only to the organization's members.

The directory facilitates communication 

among the members and encourages the exchange of ideas and expertise. Because the directory lists the members in a similar noncommercial format without advertising and isn’t 

distributed to the public, its sale doesn’t confer 

private commercial benefits on the members. 

The sale of the directory does contribute importantly to the organization's exempt purpose and 

isn’t an unrelated trade or business. This directory differs from the publication discussed next 

because of its noncommercial characteristics.

Sales of advertising space. A national association of law enforcement officials publishes a 

monthly journal that contains articles and other 

editorial material of professional interest to its 

members. The journal is distributed without 

charge, mainly to the organization's members.

The organization sells advertising space in 

the journal either for conventional advertising or 

to merely identify the purchaser without a commercial message. Some of the noncommercial 

advertising identifies the purchaser in a separate space, and some consists of listings of 60 

or more purchasers per page. A business firm 

identified in a separate space is further identified in an Index of Advertisers.

The organization solicits advertising by personal contacts. Advertising from large firms is 

solicited by contacting their chief executive officer or community relations officer rather than 

their advertising manager. The organization 

also solicits advertising in form letters appealing 

for corporate and personal contributions.

An exempt organization's sale of advertising 

placed for the purchaser's commercial benefit is 

a commercial activity. Goodwill derived by the 

purchaser from being identified as a patron of 

the organization is usually considered a form of 

commercial benefit. Therefore, advertising in an 

exempt organization's publication is generally 

presumed to be placed for the purchaser's commercial benefit, even if it has no commercial 

message. However, this presumption isn’t conclusive if the purchaser's patronage would be 

difficult to justify commercially in view of the 

facts and circumstances. In that case, other factors should also be considered in determining 

whether a commercial benefit can be expected. 

Those other factors include:

1. The normal manner in which the publication is circulated;

2. The territorial scope of the circulation;

3. The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, 

the commercial interest of the advertisers;

4. The eligibility of the publishing organization to receive tax-deductible contributions; and

5. The commercial or noncommercial methods used to solicit the advertisers.

In this situation, the purchaser of a separate 

advertising space without a commercial message can nevertheless expect a commercial 

benefit from the goodwill derived from being 

identified in that manner as a patron of the organization. However, the purchaser of a listing 

can’t expect more than an inconsequential benefit. Therefore, the sale of separate spaces, but 

not the listings, is an unrelated trade or business.

Sales of cattle for commissions. An agricultural organization, whose exempt purposes are 

to promote better conditions for cattle breeders 

and to improve the breed generally, engages in 

an unrelated trade or business when it regularly 

sells cattle for its members on a commission 

basis.

Sales of hearing aids. A tax-exempt hospital, 

whose primary activity is rehabilitation, sells 

hearing aids to patients. This activity is an essential part of the hospital's program to test and 

evaluate patients with hearing deficiencies and 

contributes importantly to its exempt purpose. 

The hearing aid sales aren't an unrelated trade 

or business.

School facilities. An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational 

program. During the summer, the school operates a tennis club open to the general public. 

Employees of the school run the club, including 

collecting membership fees and scheduling 

court time.

Another exempt school leases the same 

type of facilities to an unrelated individual who 

runs a tennis club for the summer. The lease is 

for a fixed fee that doesn’t depend on the income or profits derived from the leased property.

In both situations, the organization’s exempt 

purpose is the advancement of education. Furnishing tennis facilities in the manner described 

doesn't further that exempt purpose. These activities are unrelated trades or businesses. 

However, in the second situation the income 

derived from the leasing of the property may be 

excluded from UBTI as rent from real property. 

See Rents under Exclusions in chapter 4.

School handicraft shop. An exempt vocational school operates a handicraft shop that 

sells articles made by students in their regular 

courses of instruction. The students are paid a 

percentage of the sales price. In addition, the 

shop sells products made by local residents 

who make articles at home according to the 

Page 6 Chapter 3 Unrelated Trade or Business
shop's specifications. The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. Although many local 

participants are former students of the school, 

any qualified person may participate in the program. The sale of articles made by students 

doesn’t constitute an unrelated trade or business, but the sale of products made by local 

residents is an unrelated trade or business and 

is subject to unrelated business income tax.

Selling endorsements. An exempt scientific 

organization enjoys an excellent reputation in 

the field of biological research. It exploits this 

reputation regularly by selling endorsements of 

laboratory equipment to manufacturers. Endorsing laboratory equipment doesn’t contribute 

importantly to the accomplishment of any purpose for which exemption is granted to the organization. Accordingly, the sale of endorsements is an unrelated trade or business.

Services provided with lease. An exempt 

university leases its football stadium during several months of the year to a professional football team for a fixed fee. Under the lease agreement, the university furnishes heat, light, and 

water and is responsible for all ground maintenance. It also provides dressing room, linen, 

and stadium security services for the professional team.

Leasing of the stadium is an unrelated trade 

or business. In addition, the substantial services 

furnished for the convenience of the lessee go 

beyond those usually provided with the rental of 

space for occupancy only. Therefore, the income from this lease is rent from real property 

and unrelated business taxable income.

Sponsoring entertainment events. An exempt university has a regular faculty and a regularly enrolled student body. During the school 

year, the university sponsors the appearance of 

professional theater companies and symphony 

orchestras that present drama and musical performances for the students and faculty members. Members of the general public also are 

admitted. The university advertises these performances and supervises advance ticket sales 

at various places, including such university facilities as the cafeteria and the university bookstore. Although the presentation of the performances makes use of an intangible generated by 

the university's exempt educational functions—the presence of the student body and 

faculty—such drama and music events contribute importantly to the overall educational and 

cultural functions of the university. Therefore, 

the activity isn’t an unrelated trade or business.

Travel tour programs. Travel tour activities 

that are a trade or business are an unrelated 

trade or business if the activities aren’t substantially related to the purpose for which tax exemption was granted to the organization.

Example 1. A tax-exempt university alumni 

association provides a travel tour program for 

its members and their families. The organization 

works with various travel agencies and schedules approximately ten tours a year to various 

places around the world. It mails out promotional material and accepts reservations for fees 

paid by the travel agencies on a per-person basis.

The organization provides an employee for 

each tour as a tour leader. There is no formal 

educational program conducted with these 

tours, and they don’t differ from regular commercially operated tours (if there is a intent to 

make a profit).

By providing travel tours to its members, the 

organization is engaging in a regularly conducted trade or business. Even if the tours it offers 

support the university, financially and otherwise, 

and encourage alumni to do the same, the 

travel tours don’t contribute importantly to the 

organization's exempt purpose of promoting education. Therefore, the sale of the travel tours is 

an unrelated trade or business.

Example 2. A tax-exempt organization 

formed for the purpose of educating individuals 

about the geography and the culture of the United States provides study tours to national 

parks and other locations within the United 

States. These tours are conducted by teachers 

and others certified by the state board of education. The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who 

agree to participate in the required study program associated with the tour taken. A tour's 

study program consists of instruction on subjects related to the location being visited on the 

tour. Each tour group brings along a library of 

material related to the subjects being studied on 

the tour. During the tour, 5 or 6 hours per day 

are devoted to organized study, preparation of 

reports, lectures, instruction, and recitation by 

the students. Examinations are given at the end 

of each tour. The state board of education 

awards academic credit for tour participation. 

Because these tours are substantially related to 

the organization's exempt purpose, they aren’t 

an unrelated trade or business.

Yearbook advertising. An exempt organization receives income from the sale of advertising in its annual yearbook. The organization 

hires an independent commercial firm, under a 

contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. This firm is 

paid a percentage of the gross advertising receipts for selling the advertising, collecting from 

advertisers, and printing the yearbook. This advertising activity is an unrelated trade or business.

Youth residence. An exempt organization, 

whose purpose is to provide for the welfare of 

young people, rents rooms primarily to people 

under age 25. The residence units are operated 

on, and as a part of, the premises in which the 

organization carries on the social, recreational, 

and guidance programs for which it was recognized as exempt. The facilities are under the 

management and supervision of trained career 

professionals who provide residents with personal counseling, physical education programs, 

and group recreational activities. The rentals 

aren’t an unrelated trade or business because 

renting the rooms is substantially related to the 

organization's exempt purpose.

Excluded Trade or 

Business Activities

The following activities are specifically excluded 

from the definition of unrelated trade or business.

Gaming. In general, games of chance do not 

further an exempt purpose. An exempt organization that generates revenue from the conduct 

of activities will be operating an unrelated trade 

or business, unless a exception applies. The 

exceptions to the general rule (that gaming 

does not usually further an exempt purpose) include organizations whose exempt purposes include social or recreational activities. For these 

organizations, gaming itself may further an exempt purpose.

More information about gaming activities by 

exempt organizations can be found in Publication 3079, Tax-Exempt Organizations and Gaming.

Bingo games. Bingo games may qualify for a 

specific exclusion from the definition of unrelated trade or business. To qualify for this exclusion, the bingo game must meet the following 

requirements.

1. It meets the legal definition of bingo.

2. It is legal where it is played.

3. It is played in a jurisdiction where bingo 

games aren’t regularly conducted by 

for-profit organizations.

Gambling activities other than bingo.

Games of chance conducted by an exempt organization may avoid being treated as an unrelated trade or business if they are:

• Conducted with substantially all volunteer 

labor,

• Qualified public entertainment activities, 

and

• Games of chance conducted in North Dakota.

Legal definition. For a game to meet the 

legal definition of bingo, wagers must be 

placed, winners must be determined, and prizes or other property must be distributed in the 

presence of all persons placing wagers in that 

game.

A wagering game that doesn’t meet the legal definition of bingo doesn’t qualify for the exclusion, regardless of its name. For example, 

“instant bingo,” in which a player buys a prepackaged bingo card with pull-tabs that the 

player removes to determine if he or she is a 

winner, doesn’t qualify. 

Legal where played. This exclusion applies only if bingo is legal under the laws of the 

jurisdiction where it is conducted. The fact that 

a jurisdiction's law that prohibits bingo is rarely 

enforced or is widely disregarded doesn’t make 

the conduct of bingo legal for the exception and 

is therefore an unrelated trade or business.

No for-profit games where played. This 

exclusion applies only if for-profit organizations 

can’t regularly conduct bingo games in any part 

of the same jurisdiction. Jurisdiction is normally 

Chapter 3 Unrelated Trade or Business Page 7
the entire state; however, in certain situations, 

local jurisdiction will control.

Example. Tax-exempt organizations X and 

Y are organized under the laws of state N, 

which has a law that permits exempt organizations to conduct bingo games. In addition, 

for-profit organizations are permitted to conduct 

bingo games in city S, a resort community located in county R. Several for-profit organizations 

conduct nightly games. Y conducts weekly 

bingo games in city S, while X conducts weekly 

games in county R. Since state law confines the 

for-profit organizations to city S, local jurisdiction controls. Y's bingo games conducted in city 

S are an unrelated trade or business. However, 

X's bingo games conducted in county R outside 

of city S aren’t an unrelated trade or business.

See Pub. 3079, for more detailed information.

Convenience of members. A trade or business conducted by a 501(c)(3) organization or 

by a state college or university primarily for the 

convenience of its members, students, patients, 

officers, or employees isn’t an unrelated trade 

or business. For example, a laundry operated 

by a college for the purpose of laundering dormitory linens and students' clothing isn’t an unrelated trade or business.

Convention or trade show activity. An unrelated trade or business doesn’t include qualified 

convention or trade show activities conducted 

at a convention, annual meeting, or trade show.

A qualified convention or trade show activity 

is any activity of a kind traditionally conducted 

by a qualifying organization in conjunction with 

an international, national, state, regional, or local convention, annual meeting, or show if:

1. One of the purposes of the organization in 

sponsoring the activity is promoting and 

stimulating interest in, and demand for, the 

products and services of that industry or 

educating the persons in attendance regarding new products and services or new 

rules and regulations affecting the industry; and

2. The show is designed to achieve its purpose through the character of the exhibits 

and the extent of the industry products 

that are displayed.

For these purposes, a qualifying organization is one described in section 501(c)(3), 

501(c)(4), 501(c)(5), or 501(c)(6). The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity.

The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show isn’t an unrelated 

trade or business even if the exhibitors who rent 

the space are permitted to sell or solicit orders. 

For this purpose, a supplier's exhibit is one in 

which the exhibitor displays goods or services 

that are supplied to, rather than by, members of 

the qualifying organization in the conduct of 

these members' own trades or businesses.

Certain Internet activities conducted by a 

trade association described in section 501(c)(6) 

will be considered qualified convention and 

trade show activity if conducted on a special 

supplementary section of the association's 

website in conjunction with a trade show conducted by the association. The trade show itself 

must be a qualified convention and trade show 

activity. The supplementary section of the website must be ancillary to, and serve to augment 

and enhance, the trade show, as when it makes 

available the same information available at the 

trade show and is available only during a time 

period that coincides with the time period that 

the trade show is in operation. Conversely, Internet activities that aren’t conducted in conjunction with a qualified convention and trade 

show activity and that don’t augment and enhance the trade show can’t themselves be 

qualified convention and trade show activity.

Distribution of low-cost articles. The term 

“unrelated trade or business” doesn’t include 

activities relating to the distribution of low-cost 

articles incidental to soliciting charitable contributions. This applies to organizations described 

in section 501 that are eligible to receive charitable income tax deductible contributions.

A distribution is considered incidental to the 

solicitation of a charitable contribution if:

1. The recipient didn’t request the distribution,

2. The distribution is made without the express consent of the recipient, and

3. The article is accompanied by a request 

for a charitable contribution to the organization and a statement that the recipient 

may keep the low-cost article regardless 

of whether a contribution is made.

An article is considered low cost if the cost 

of an item (or the aggregate costs if more than 

one item) distributed to a single recipient in a 

tax year isn’t more than $11.20 (in 2020), indexed annually for inflation. The cost of an article is the cost to the organization that distributes the item or on whose behalf it is 

distributed.

Employee association sales. The sale of certain items by a local association of employees 

described in section 501(c)(4), organized before May 17, 1969, isn’t an unrelated trade or 

business if the items are sold for the convenience of the association's members at their 

usual place of employment. This exclusion applies only to the sale of work-related clothes 

and equipment and items normally sold through 

vending machines, food dispensing facilities, or 

by snack bars.

Exchange or rental of member lists. The exchange or rental of member or donor lists between organizations described in section 501 

that are eligible to receive charitable contributions isn’t included in the term unrelated trade 

or business.

Hospital services. The providing of certain 

services at or below cost by an exempt hospital 

to other exempt hospitals that have facilities for 

100 or fewer inpatients isn’t an unrelated trade 

or business. This exclusion applies only to services described in section 501(e)(1)(A).

Pole rentals. The term unrelated trade or business doesn’t include qualified pole rentals by a 

mutual or cooperative telephone or electric 

company described in section 501(c)(12). A 

qualified pole rental is the rental of a pole (or 

other structure used to support wires) if the pole 

(or other structure) is used:

1. By the telephone or electric company to 

support one or more wires that the company uses in providing telephone or electric services to its members, and

2. According to the rental, to support one or 

more wires (in addition to the wires described in 1) for use in connection with the 

transmission by wire of electricity or of telephone or other communications.

For this purpose, the term rental includes any 

sale of the right to use the pole (or other structure).

Public entertainment activity. An unrelated 

trade or business doesn’t include a qualified 

public entertainment activity. A public entertainment activity is one traditionally conducted at a 

fair or exposition promoting agriculture and education, including any activity whose purpose is 

designed to attract the public to fairs or expositions or to promote the breeding of animals or 

the development of products or equipment.

A qualified public entertainment activity is 

one conducted by a qualifying organization:

1. In conjunction with an international, national, state, regional, or local fair or exposition;

2. In accordance with state law that permits 

the activity to be operated or conducted 

solely by such an organization or by an 

agency, instrumentality, or political subdivision of the state; or

3. In accordance with state law that permits 

an organization to be granted a license to 

conduct an activity for not more than 20 

days on paying the state a lower percentage of the revenue from the activity than 

the state charges nonqualifying organizations that hold similar activities.

For these purposes, a qualifying organization is an organization described in section 

501(c)(3), 501(c)(4), or 501(c)(5) that regularly 

conducts an agricultural and educational fair or 

exposition as one of its substantial exempt purposes. Its conducting qualified public entertainment activities will not affect determination of its 

exempt status.

Qualified sponsorship activities. Receiving 

qualified sponsorship payments isn’t an unrelated trade or business, and the payments aren’t 

subject to unrelated business income tax.

Qualified sponsorship payment. This is 

any payment made by a person engaged in a 

trade or business for which the person will receive no substantial benefit other than the use 

or acknowledgment of the business name, logo, 

or product lines in connection with the organization's activities. “Use or acknowledgment” 

doesn’t include advertising the sponsor's products or services. The organization's activities include all its activities, whether or not related to 

its exempt purposes.

For example, if, in return for receiving a 

sponsorship payment, an organization 

Page 8 Chapter 3 Unrelated Trade or Business
promises to use the sponsor's name or logo in 

acknowledging the sponsor's support for an educational or fundraising event, the payment is a 

qualified sponsorship payment and isn’t subject 

to the unrelated business income tax.

Providing facilities, services, or other privileges (for example, complimentary tickets, 

pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the 

sponsor's designees in connection with a sponsorship payment does not affect whether the 

payment is a qualified sponsorship payment. Instead, providing these goods or services is treated as a separate transaction in determining 

whether the organization has unrelated business income from the event. Generally, if the 

services or facilities aren’t a substantial benefit 

or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax.

Similarly, the sponsor's receipt of a license 

to use an intangible asset (for example, a trademark, logo, or designation) of the organization 

is treated as separate from the qualified sponsorship transaction in determining whether the 

organization has UBTI.

If part of a payment would be a qualified 

sponsorship payment if paid separately, that 

part is treated as a separate payment. For example, if a sponsorship payment entitles the 

sponsor to both product advertising and the use 

or acknowledgment of the sponsor's name or 

logo by the organization, then the unrelated 

business income tax doesn’t apply to the part of 

the payment that is more than the fair market 

value of the product advertising.

Advertising. A payment isn’t a qualified 

sponsorship payment if, in return, the organization advertises the sponsor's products or services. For information on the treatment of payments for advertising, see Exploitation of 

Exempt Activity—Advertising Sales in chapter 4.

Advertising includes:

1. Messages containing qualitative or comparative language, price information, or 

other indications of savings or value;

2. Endorsements; and

3. Inducements to purchase, sell, or use the 

products or services.

The use of promotional logos or slogans that 

are an established part of the sponsor's identity 

isn’t, by itself, advertising. In addition, mere distribution or display of a sponsor's product by the 

organization to the public at a sponsored event, 

whether for free or for remuneration, is considered use or acknowledgment of the product 

rather than advertising.

Exception for contingent payments. A 

payment isn’t a qualified sponsorship payment 

if its amount is contingent, by contract or otherwise, upon the level of attendance at one or 

more events, broadcast ratings, or other factors 

indicating the degree of public exposure to one 

or more events. However, the fact that a sponsorship payment is contingent upon an event 

actually taking place or being broadcast 

doesn’t, by itself, affect whether a payment 

qualifies.

Exception for conventions and trade 

shows. A payment isn’t a qualified sponsorship payment if it is made in connection with 

any qualified convention or trade show activity. 

The exclusion of qualified convention or trade 

show activities from the definition of unrelated 

trade or business is explained earlier under 

Convention or trade show activity.

Exception for periodicals. A payment 

isn’t a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of 

the business name, logo, or product lines in the 

organization's periodical. For this purpose, a 

periodical is any regularly scheduled and printed material (for example, a monthly journal) 

published by or on behalf of the organization. It 

doesn’t include material that is related to and 

primarily distributed in connection with a specific event conducted by the organization (for 

example, a program or brochure distributed at a 

sponsored event).

The treatment of payments that entitle the 

payer to the depiction of the payer's name, 

logo, or product lines in an organization's periodical is determined under the rules that apply 

to advertising activities. See Sales of advertising space under Examples, earlier in this chapter. Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4.

Selling donated merchandise. A trade or 

business that consists of selling merchandise, 

substantially all of which the organization received as gifts or contributions, isn’t an unrelated trade or business. For example, a thrift shop 

operated by a tax-exempt organization that 

sells donated clothes and books to the general 

public, with the proceeds going to the exempt 

organization, isn’t an unrelated trade or business.

Volunteer workforce. Any trade or business 

in which substantially all the work is performed 

for the organization without compensation isn’t 

an unrelated trade or business.

Example 1. A retail store operated by an 

exempt orphanage where unpaid volunteers 

perform substantially all the work in carrying on 

the business isn’t an unrelated trade or business.

Example 2. A volunteer fire company conducts weekly public dances. Holding public 

dances and charging admission on a regular 

basis may, given the facts and circumstances of 

a particular case, be considered an unrelated 

trade or business. However, because the work 

at the dances is performed by unpaid volunteers, the activity isn’t an unrelated trade or 

business.

4.

Unrelated 

Business 

Taxable Income

The term “unrelated business taxable income” 

(UBTI) generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, 

less the deductions directly connected with carrying on the trade or business. Section 512(a)

(6) requires an organization that regularly carries on two or more unrelated business activities to calculate its unrelated business taxable 

income, including for purposes of determining 

any net operating loss deduction, separately 

with respect to each such trade or business. 

The UBTI of the organization is the sum of the 

UBTI computed from each separate unrelated 

trade or business. For the purpose of this sum, 

the UBTI from any of the unrelated trades or 

businesses can't be less than zero. See Regulations section 1.512(a)-6 for more information.

In computing UBTI, gross income and deductions are subject to the modifications and special rules explained in this chapter. Whether a 

particular item of income or expense falls within 

any of these modifications or special rules must 

be determined by all the facts and circumstances in each specific case. For example, if the 

organization received a payment termed rent 

that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained 

by the organization as a partner or joint venturer, the payment isn’t within the income exclusion for rents, discussed later under Exclusions.

Income

Generally, unrelated business income is taxable, but there are exclusions and special rules 

that must be considered when figuring the income.

Exclusions

The following types of income (and deductions 

directly connected with the income) are generally excluded when figuring UBTI.

Dividends, interest, annuities, and other investment income. All dividends, interest, annuities, payments with respect to securities 

loans, income from notional principal contracts, 

and other income from an exempt organization's ordinary and routine investments that the 

IRS determines are substantially similar to 

these types of income are excluded in computing UBTI.

Exception for insurance activity income 

of a controlled foreign corporation. This 

Chapter 4 Unrelated Business Taxable Income Page 9
exclusion doesn’t apply to income from certain 

insurance activities of an exempt organization's 

controlled foreign corporation. The income isn’t 

excludable dividend income, but instead is 

UBTI to the extent it would be so treated if the 

exempt organization had earned it directly. Certain exceptions to this rule apply. For more information, see section 512(b)(17).

Other exceptions. This exclusion doesn’t 

apply to unrelated debt-financed income (discussed under Income From Debt-Financed 

Property, later), or to certain rents, royalties, interest or annuities received from a controlled 

corporation (discussed under Income From 

Controlled Organizations, later).

Income from lending securities. Payments received with respect to a security loan 

are excluded in computing UBTI only if the loan 

is made under an agreement that:

1. Provides for the return to the exempt organization of securities identical to the securities loaned,

2. Requires payments to the organization of 

amounts equivalent to all interest, dividends, and other distributions that the 

owner of the securities is entitled to receive during the period of the loan,

3. Doesn’t reduce the organization's risk of 

loss or opportunity for gain on the securities,

4. Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a 

fair market value each business day during the period of the loan in an amount not 

less than the fair market value of the securities at the close of the preceding business day, and

5. Permits the organization to terminate the 

loan upon notice of not more than 5 business days.

Payments with respect to securities loans include:

1. Amounts in respect of dividends, interest, 

and other distributions,

2. Fees based on the period of time the loan 

is in effect and the fair market value of the 

security during that period,

3. Income from collateral security for the 

loan, and

4. Income from the investment of collateral 

security.

The payments are considered to be from the 

securities loaned and not from collateral security or the investment of collateral security from 

the loans. Any deductions that are directly connected with collateral security for the loan, or 

with the investment of collateral security, are 

considered deductions that are directly connected with the securities loaned.

Royalties. Royalties, including overriding royalties, are excluded in computing UBTI.

To be considered a royalty, a payment must 

relate to the use of a valuable right. Payments 

for trademarks, trade names, or copyrights are 

ordinarily considered royalties. Similarly, 

payments for the use of a professional athlete's 

name, photograph, likeness, or facsimile signature are ordinarily considered royalties. However, royalties don’t include payments for personal services. Therefore, payments for 

personal appearances and interviews aren’t excluded as royalties and must be included in figuring UBTI.

Unrelated business taxable income doesn’t 

include royalty income received from licensees 

by an exempt organization that is the legal and 

beneficial owner of patents assigned to it by inventors for specified percentages of future royalties.

Mineral royalties are excluded whether 

measured by production or by gross or taxable 

income from the mineral property. However, the 

exclusion doesn’t apply to royalties that stem 

from an arrangement whereby the organization 

owns a working interest in a mineral property 

and is liable for its share of the development 

and operating costs under the terms of its 

agreement with the operator of the property. To 

the extent they aren’t treated as loans under 

section 636 (relating to income tax treatment of 

mineral production payments), payments for 

mineral production are treated in the same 

manner as royalty payments for the purpose of 

computing UBTI. To the extent they are treated 

as loans, any payments for production that are 

the equivalent of interest are treated as interest 

and are excluded.

Exceptions. This exclusion doesn’t apply 

to debt-financed income (discussed under Income From Debt-Financed Property, later) or to 

royalties received from a controlled corporation 

(discussed under Income From Controlled Organizations, later).

Rents. Rents from real property, including elevators and escalators, are excluded in computing UBTI. Rents from personal property aren’t 

excluded. However, special rules apply to 

“mixed leases” of both real and personal property.

Mixed leases. In a mixed lease, all of the 

rents are excluded if the rents attributable to the 

personal property aren’t more than 10% of the 

total rents under the lease, as determined when 

the personal property is first placed in service 

by the lessee. If the rents attributable to personal property are more than 10% but not more 

than 50% of the total rents, only the rents attributable to the real property are excluded. If the 

rents attributable to the personal property are 

more than 50% of the total rents, none of the 

rents are excludable.

Property is placed in service when the lessee first may use it under the terms of a lease. 

For example, property subject to a lease entered into on November 1, for a term starting on 

January 1 of the next year, is considered placed 

in service on January 1, regardless of when the 

lessee first actually uses it.

If separate leases are entered into for real 

and personal property and the properties have 

an integrated use (for example, one or more 

leases for real property and another lease or 

leases for personal property to be used on the 

real property), all the leases will be considered 

as one lease.

The rent attributable to the personal property must be recomputed, and the treatment of 

the rents must be redetermined, if:

1. The rent attributable to all the leased personal property increases by 100% or more 

because additional or substitute personal 

property is placed in service, or

2. The lease is modified to change the rent 

charged (whether or not the amount of 

rented personal property changes).

Any change in the treatment of rents resulting 

from the recomputation is effective only for the 

period beginning with the event that caused the 

recomputation.

Exception for rents based on net profit. 

The exclusion for rents doesn’t apply if the 

amount of the rent depends on the income or 

profits derived by any person from the leased 

property, other than an amount based on a 

fixed percentage of the gross receipts or sales.

Exception for income from personal 

services. Payment for occupying space when 

personal services are also rendered to the occupant doesn’t constitute rent from real property. Therefore, the exclusion doesn’t apply to 

transactions such as renting hotel rooms, 

rooms in boarding houses or tourist homes, and 

space in parking lots or warehouses.

Other exceptions. This exclusion doesn’t 

apply to unrelated debt-financed income (discussed under Income From Debt-Financed 

Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), or investment income 

(dividends, interest, rents, etc.) received by organizations described in sections 501(c)(7), 

501(c)(9), and 501(c)(17). See Special Rules 

for Social Clubs, VEBAs, and SUBs, discussed 

later, for more information.

Income from research. A tax-exempt organization may exclude income from research 

grants or contracts from UBTI. However, the extent of the exclusion depends on the nature of 

the organization and the type of research.

Income from research for the United States, 

any of its agencies or instrumentalities, or a 

state or any of its political subdivisions is excluded when computing UBTI.

For a college, university, or hospital, all income from research, whether fundamental or 

applied, is excluded in computing UBTI.

When an organization is operated primarily 

to conduct fundamental research (as distinguished from applied research) and the results 

are freely available to the general public, all income from research performed for any person 

is excluded in computing UBTI.

The term research, for this purpose, doesn’t 

include activities of a type normally conducted 

as an incident to commercial or industrial operations, such as testing or inspecting materials 

or products, or designing or constructing equipment, buildings, etc. In addition, the term fundamental research doesn’t include research conducted for the primary purpose of commercial 

or industrial application.

Page 10 Chapter 4 Unrelated Business Taxable Income
Gains and losses from disposition of property. Also excluded from UBTI are gains or 

losses from the sale, exchange, or other disposition of property other than:

1. Stock in trade or other property of a kind 

that would properly be includible in inventory if on hand at the close of the tax year,

2. Property held primarily for sale to customers in the ordinary course of a trade or 

business, or

3. Cutting of timber that an organization has 

elected to consider as a sale or exchange 

of the timber.

It should be noted that the last exception relates only to cut timber. The sale, exchange, or 

other disposition of standing timber is excluded 

from the computation of unrelated business income, unless it constitutes property held for 

sale to customers in the ordinary course of business.

Lapse or termination of options. Any 

gain from the lapse or termination of options to 

buy or sell securities is excluded from UBTI. 

The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Therefore, this exclusion isn’t available if the organization is 

engaged in the trade or business of writing options or the options are held by the organization 

as inventory or for sale to customers in the ordinary course of a trade or business.

Exception. This exclusion doesn’t apply to 

unrelated debt-financed income, discussed 

later under Income From Debt-Financed Property.

Gain or loss on disposition of certain 

brownfield property. Gain or loss from the 

qualifying sale, exchange, or other disposition 

of a qualifying brownfield property (as defined in 

section 512(b)(19)(C)), which was acquired by 

the organization after December 31, 2005 and 

before January 1, 2011, is excluded from UBTI 

and is excepted from the debt-financed rules. 

See sections 512(b)(19) and 514(b)(1)(E).

Income from services provided under federal license. There is a further exclusion from 

UBTI of income from a trade or business conducted by a religious order or by an educational 

organization maintained by the order.

This exclusion applies only if the following 

requirements are met.

1. The trade or business must have been operated by the order or by the institution before May 27, 1959.

2. The trade or business must provide services under a license issued by a federal 

regulatory agency.

3. More than 90% of the net income from the 

business for the tax year must be devoted 

to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption.

4. The rates or other charges for these services must be fully competitive with the 

rates or other charges of similar taxable 

businesses. Rates or other charges for 

these services will be considered as fully 

competitive if they are neither materially 

higher nor materially lower than the rates 

charged by similar businesses operating 

in the same general area.

Exception. This exclusion doesn’t apply to 

unrelated debt-financed income (discussed under Income From Debt-Financed Property, 

later).

Member income of mutual or cooperative 

electric companies. Income of a mutual or 

cooperative electric company described in section 501(c)(12) that is treated as member income under subparagraph (H) of that section is 

excluded from UBTI.

Dues of Agricultural 

Organizations and Business 

Leagues

Dues received from associate members by organizations exempt under section 501(c)(5) or 

section 501(c)(6) may be treated as gross income from an unrelated trade or business if the 

associate member category exists for the principal purpose of producing unrelated business 

income. For example, if an organization creates 

an associate member category solely to allow 

associate members to purchase insurance 

through the organization, the associate member 

dues may be unrelated business income.

Exception. Associate member dues received by an agricultural or horticultural organization aren’t treated as gross income from an 

unrelated trade or business, regardless of their 

purpose, provided the associate member dues 

do not exceed an annual limit, which is indexed 

for inflation. The limit on dues paid by an associate member is $171 in 2020.

If the required annual dues are more than 

the limit, the entire amount is treated as income 

from an unrelated business unless the associate member category was formed or availed 

of for the principal purpose of furthering the organization's exempt purposes.

Deductions

To qualify as allowable deductions in computing 

UBTI, the expenses, depreciation, and similar 

items must generally be allowable income tax 

deductions that are directly connected with carrying on the unrelated trade or business to 

which they relate. They can’t be directly connected with excluded income.

For an exception to the “directly connected” 

requirement, see Charitable contributions deduction, under Modifications, later.

Directly Connected

To be directly connected with the conduct of an 

unrelated trade or business, deductions must 

have a proximate and primary relationship to 

carrying on that trade or business. For an exception, see Expenses attributable to exploitation of exempt activities, later.

Expenses attributable solely to unrelated 

business. Expenses, depreciation, and similar items attributable solely to the conduct of an 

unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions.

For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are 

deductible to the extent otherwise allowable.

Expenses attributable to dual use of facilities or personnel. When facilities or personnel are used both to conduct exempt functions 

and to conduct an unrelated trade or business, 

expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable 

basis. The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable 

as a deduction in computing UBTI if the expense is otherwise an allowable income tax deduction.

An exempt organization with more than one 

unrelated trade or business likewise allocates 

deductions between separate unrelated trades 

or businesses using the reasonable basis 

standard.

Example 1. A school recognized as a 

tax-exempt organization contracts with an individual to conduct a summer tennis camp. The 

school provides the individual with tennis 

courts, housing, and dining facilities, and personnel to maintain and operate them. The contracted individual hires the instructors, recruits 

campers, and provides supervision of the tennis 

camp. The income the school receives from the 

individual under the contract from this activity 

for the use of its facilities and personnel is from 

a dual use of the facilities and personnel, not 

from conducting an educational activity. The 

school, in computing its UBTI, may deduct an 

allocable part of the expenses attributable to 

the facilities and personnel it makes available 

under the contract.

Example 2. An exempt organization with 

gross income from an unrelated trade or business pays its president $90,000 a year. The 

president devotes approximately 10% of his 

time to the unrelated business. To figure the organization's UBTI, a deduction of $9,000 

($90,000 × 10%) is allowed for the salary paid 

to its president.

Expenses attributable to exploitation of exempt activities. Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity aren’t deductible in 

computing UBTI from an unrelated trade or 

business that exploits the exempt activity. (See 

Exploitation of exempt functions under Not substantially related in chapter 3.) This is because 

they don’t have a proximate and primary relationship to the unrelated trade or business, and 

therefore, they don’t qualify as directly connected with that business.

Exception. Expenses, depreciation, and 

similar items may be treated as directly connected with the conduct of the unrelated business if 

all the following conditions are met.

Chapter 4 Unrelated Business Taxable Income Page 11
1. The unrelated business exploits the exempt activity.

2. The unrelated business is a type normally 

conducted for profit by taxable organizations.

3. The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business.

The amount treated as directly connected is the 

smaller of:

1. The excess of these expenses, depreciation, and similar items over the income 

from, or attributable to, the exempt activity; 

or

2. The gross unrelated business income reduced by all other expenses, depreciation, 

and other items that are actually directly 

connected.

The application of these rules to an advertising activity that exploits an exempt publishing 

activity is explained next.

Exploitation of Exempt 

Activity—Advertising Sales

The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated 

business that exploits an exempt activity, the 

circulation, and readership of the periodical. 

Therefore, in addition to direct advertising 

costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the 

production and distribution of the editorial or 

readership content) can be treated as directly 

connected with the conduct of the advertising 

activity. (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier.)

Figuring UBTI. The UBTI of an advertising 

activity is the amount shown in the following 

chart.

IF gross advertising 

income is . . . THEN UBTI is . . .

more than direct 

advertising costs

the excess advertising income, 

reduced (but not below zero) 

by the excess, if any, of 

readership costs over 

circulation income.

equal to or less than 

direct advertising 

costs

zero.

 Circulation income and 

readership costs aren’t taken 

into account.

The terms used in the chart are explained in 

the following discussions.

Periodical Income

Gross advertising income. This is all the income from the unrelated advertising activities of 

an exempt organization periodical.

Circulation income. This is all the income 

from the production, distribution, or circulation 

of an exempt organization's periodical (other 

than gross advertising income). It includes all 

amounts from the sale or distribution of the 

readership content of the periodical, such as income from subscriptions. It also includes allocable membership receipts if the right to receive 

the periodical is associated with a membership 

or similar status in the organization.

Allocable membership receipts. This is 

the part of membership receipts (dues, fees, or 

other charges associated with membership) 

equal to the amount that would have been 

charged and paid for the periodical if:

1. The periodical was published by a taxable 

organization,

2. The periodical was published for profit, 

and

3. The member was an unrelated party dealing with the taxable organization at arm's 

length.

The amount used to allocate membership 

receipts is the amount shown in the following 

chart.

For this purpose, the total periodical costs 

are the sum of the direct advertising costs and 

the readership costs, explained under Periodical Costs, later. The cost of other exempt activities means the total expenses incurred by the 

organization in connection with its other exempt 

activities, not offset by any income earned by 

the organization from those activities.

IF . . .

THEN the amount used to 

allocate membership 

receipts is . . .

20% or more of the 

total circulation 

consists of sales to 

nonmembers

the subscription price charged 

nonmembers.

the above condition 

doesn’t apply, and

20% or more of the 

members pay 

reduced dues 

because they do not 

receive the periodical

the reduction in dues for a 

member not receiving the 

periodical.

neither of the above 

conditions applies

the membership receipts 

multiplied by this fraction:

Total periodical costs

Total periodical costs

Plus

Cost of other exempt activities

Example 1. U is an exempt scientific organization with 10,000 members who pay annual dues of $15. One of U's activities is publishing a monthly periodical distributed to all of 

its members. U also distributes 5,000 additional 

copies of its periodical to nonmembers, who 

subscribe for $10 a year. Since the nonmember 

circulation of U's periodical represents one-third 

(more than 20%) of its total circulation, the subscription price charged to nonmembers is used 

to determine the part of U's membership receipts allocable to the periodical. Thus, U's allocable membership receipts are $100,000 ($10 

times 10,000 members), and U's total circulation income for the periodical is $150,000 

($100,000 from members plus $50,000 from 

sales to nonmembers).

Example 2. Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Assume also that U's members may elect not to 

receive the periodical, in which case their dues 

are reduced from $15 a year to $6 a year, and 

that only 3,000 members elect to receive the 

periodical and pay the full dues of $15 a year. 

U's stated subscription price of $9 to members 

consistently results in an excess of total income 

(including gross advertising income) attributable to the periodical over total costs of the periodical. Since the 500 copies of the periodical 

distributed to nonmembers represent only 14% 

of the 3,500 copies distributed, the $10 subscription price charged to nonmembers isn’t 

used to determine the part of membership receipts allocable to the periodical. Instead, since 

70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 

price is used to determine the subscription price 

charged to members. Thus, the allocable membership receipts will be $9 per member, or 

$27,000 ($9 times 3,000 copies). U's total circulation income is $32,000 ($27,000 plus the 

$5,000 from nonmember subscriptions).

Periodical Costs

Direct advertising costs. These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical.

Examples of allowable deductions under 

this classification include agency commissions 

and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of 

advertising lineage in the periodical. Also included are other deductions commonly classified 

as advertising costs under standard account 

classifications, such as artwork and copy preparation, telephone, telegraph, postage, and 

similar costs directly connected with advertising.

In addition, direct advertising costs include 

the part of mechanical and distribution costs attributable to advertising lineage. For this purpose, the general account classifications of 

items includible in mechanical and distribution 

costs ordinarily employed in business-paper 

and consumer-publication accounting provide a 

guide for the computation. Accordingly, the mechanical and distribution costs include the part 

of the costs and other expenses of composition, 

press work, binding, mailing (including paper 

and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the 

publication.

In the absence of specific and detailed records, the part of mechanical and distribution 

costs attributable to the periodical's advertising 

lineage can be based on the ratio of advertising 

lineage to total lineage in the periodical, if this 

allocation is reasonable.

Readership costs. These are all expenses, 

depreciation, and similar items directly connected with the production and distribution of the 

readership content of the periodical.

Page 12 Chapter 4 Unrelated Business Taxable Income
Costs partly attributable to other activities. 

Deductions properly attributable to exempt activities other than publishing the periodical may 

not be allocated to the periodical. When expenses are attributable both to the periodical and to 

the organization's other activities, an allocation 

must be made on a reasonable basis. The 

method of allocation will vary with the nature of 

the item, but once adopted, it should be used 

consistently. Allocations based on dollar receipts from various exempt activities generally 

aren’t reasonable since receipts usually don’t 

accurately reflect the costs associated with specific activities that an exempt organization conducts.

Consolidated Periodicals

If an exempt organization publishes more than 

one periodical to produce income, it may treat 

all of them (but not less than all) as one in determining UBTI from selling advertising. The gross 

income from all the periodicals, and the deductions directly connected with them is figured on 

a consolidated basis. Consolidated treatment, 

once adopted, must be followed consistently 

and is binding. This treatment can be changed 

only with the consent of the IRS.

An exempt organization's periodical is published to produce income if:

1. The periodical generates gross advertising 

income to the organization equal to at 

least 25% of its readership costs, and

2. Publishing the periodical is an activity engaged in for profit.

Whether the publication of a periodical is an 

activity engaged in for profit can be determined 

only by all the facts and circumstances in each 

case. The facts and circumstances must show 

that the organization carries on the activity for 

economic profit, although there may not be a 

profit in a particular year. For example, if an organization begins publishing a new periodical 

whose total costs exceed total income in the 

start-up years because of lack of advertising 

sales, that doesn’t mean that the organization 

didn’t have as its objective an economic profit. 

The organization may establish that it had this 

objective by showing it can reasonably expect 

advertising sales to increase, so that total income will exceed costs within a reasonable 

time.

Example. Y, an exempt trade association, 

publishes three periodicals that it distributes to 

its members: a weekly newsletter, a monthly 

magazine, and a quarterly journal. Both the 

monthly magazine and the quarterly journal 

contain advertising that accounts for gross advertising income equal to more than 25% of 

their respective readership costs. Similarly, the 

total income attributable to each periodical has 

exceeded the total deductions attributable to 

each periodical for substantially all the years 

they have been published. The newsletter carries no advertising and its annual subscription 

price isn’t intended to cover the cost of publication. The newsletter is a service that Y distributes to all of its members in an effort to keep 

them informed of changes occurring in the business world. It is not engaged in for profit.

Under these circumstances, Y may consolidate the income and deductions from the 

monthly and quarterly journals in computing its 

UBTI. It may not consolidate the income and 

deductions from the newsletter with the income 

and deductions of its other periodicals, since 

the newsletter isn’t published for the production 

of income.

Modifications

Net operating loss (NOL). An NOL arises 

when allowable deductions exceed gross unrelated trade or business income. Subject to modifications described in section 172, the NOL is 

allowed as a deduction against unrelated business taxable income for a tax year to which the 

NOL can be carried, as described below. The 

NOL for any tax year, the carryovers of NOLs, 

and the NOL deduction are determined without 

taking into account any amount of income or 

deduction that is specifically excluded in computing UBTI. For example, a loss from an unrelated trade or business isn't diminished because the organization received dividend 

income.

In line with this concept, an NOL can arise 

only in a tax year for which the organization is 

subject to tax on unrelated business income.

The Tax Cuts and Jobs Act (P.L. 115-97) 

and the CARES Act (P.L. 116-136) substantially 

modified the NOL provisions under section 172. 

Further, section 512(a)(6) (added by the Tax 

Cuts and Jobs Act) changed the way exempt 

organizations report and figure the tax on income from unrelated trade or business activity.

NOLs arising before 2018. Prior to the addition of section 512(b)(6), an exempt organization would compute its NOL (if any) for each tax 

year on an aggregate basis, regardless of the 

number of separate unrelated trades or business conducted by the organization. NOLs arising before 2018 (pre-2018 NOLs) can be carried forward for up to 20 years. Pre-2018 NOLs 

can be applied (subject to modifications) as a 

deduction to reduce unrelated business taxable 

income without regard to the unrelated trade or 

business activity that generated the income.

Even though an NOL can arise only in a tax 

year for which the organization is subject to tax 

on unrelated business income, the pre-2018 

NOLs expire after 20 consecutive tax years. For 

example, if an organization was subject to the 

tax for 2014 and had an NOL for that year, the 

last tax year to which any part of that NOL may 

be carried over is 2034, regardless of whether 

the organization was subject to the unrelated 

business income tax in any of the intervening 

years.

NOLs arising in tax years after 2017. Section 512(a)(6) requires an organization with 

more than one unrelated trade or business to 

calculate UBTI in any tax year beginning after 

2017, including for purposes of determining any 

NOL (post-2017 NOL) or applying any 

post-2017 NOL deduction, separately with respect to each such trade or business.

The Tax Cuts and Jobs Act (P.L.115-97, 

section 13302) amended section 172(b) to 

eliminate both the expiration of NOL carryforwards and the ability to carryback NOLs to earlier tax years. Certain farming and insurance 

company losses are exceptions and can be carried back as described in section 172(b). See 

Publication 225, Farmer's Tax Guide; Publication 536, Net Operating Losses; or Publication 

542, Corporations; for additional information. 

However, the CARES Act added section 172(b)

(1)(D), which provides for carryback of NOLs 

arising in 2018, 2019, and 2020 to each of the 5 

years preceding the tax year in which the NOL 

arose. An organization that wishes to carry 

these NOLs forward must waive the carryback. 

See the Instructions for Form 990-T for more information.

In addition to largely eliminating NOL carrybacks (except for the CARES Act modification), 

the Tax Cuts and Jobs Act, as modified by the 

CARES Act, provides that the allowable NOL 

deduction for tax years beginning in 2021 cannot exceed 80% of taxable income.

An organization that had an NOL in a tax 

year beginning in 2018 or 2019 can file amended returns Form 990-T to carryback the NOL. 

See Pub. 536 for more information.

For more details on the NOL deduction, including property eligible for an extended carryback period, see section 172 and Pub. 536.

Charitable contributions deduction. An exempt organization is allowed to deduct its charitable contributions in computing its UBTI even if 

the contributions are not directly connected with 

any unrelated business.

To be deductible, the contribution must be 

paid to another qualified organization. For example, an exempt university that operates an 

unrelated business may deduct a contribution 

made to another university for educational 

work, but may not claim a deduction for contributions of amounts spent for carrying out its 

own educational program.

For purposes of the deduction, a distribution 

by a trust made under the trust instrument to a 

beneficiary, which itself is a qualified organization, is treated the same as a contribution.

Deduction limits. An exempt organization 

that is subject to the unrelated business income 

tax at corporate rates is allowed a deduction for 

charitable contributions up to 10% of its UBTI 

computed without regard to the deduction for 

contributions. See the Instructions for Form 

990-T for more information.

An exempt trust that is subject to the unrelated business income tax at trust rates is generally allowed a deduction for charitable contributions in the same amounts as allowed for 

individuals. However, the limit on the deduction 

is determined in relation to the trust's UBTI 

computed without regard to the deduction, 

rather than in relation to adjusted gross income.

Contributions in excess of the limits just described may be carried over to the next 5 tax 

years. A contribution carryover isn’t allowed, 

however, to the extent that it increases an NOL 

carryover.

Specific deduction. In computing UBTI, a 

specific deduction of $1,000 is allowed. However, the specific deduction isn’t allowed in 

computing an NOL or the NOL deduction.

Chapter 4 Unrelated Business Taxable Income Page 13
Generally, the deduction is limited to $1,000 

regardless of the number of unrelated businesses in which the organization is engaged.

Exception. An exception is provided in the 

case of a diocese, province of a religious order, 

or a convention or association of churches that 

may claim a specific deduction for each parish, 

individual church, district, or other local unit. In 

these cases, the specific deduction for each local unit is limited to the lower of:

• $1,000, or

• Gross income derived from an unrelated 

trade or business regularly conducted by 

the local unit.

This exception applies only to parishes, districts, or other local units that aren’t separate legal entities, but are components of a larger entity (diocese, province, convention, or 

association) filing Form 990-T. The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that aren’t separate legal 

entities. The local units can’t file separate returns. However, each local unit that is separately incorporated must file its own return and 

can’t include, or be included with, any other entity. See Title-holding corporations in chapter 1 

for a discussion of the only situation in which 

more than one legal entity may be included on 

the same Form 990-T.

Example. X is an association of churches 

and is divided into local units A, B, C, and D. 

Last year, A, B, C, and D derived gross income 

of, respectively, $1,200, $800, $1,500, and 

$700 from unrelated businesses that they regularly conduct. X may claim a specific deduction 

of $1,000 with respect to A, $800 with respect 

to B, $1,000 with respect to C, and $700 with 

respect to D.

Partnership Income

or Loss

An organization may have unrelated business 

income or loss as a member of an entity classified as a partnership for federal tax purposes 

(see section 7701 and corresponding regulations), rather than through direct business dealings with the public. If so, it must treat its share 

of the partnership income or loss as if it had 

conducted the business activity in its own capacity as a corporation or trust. No distinction is 

made between limited and general partners or 

managing or non-managing members of a limited liability company. The organization is required to notify the partnership of its tax-exempt 

status. See Regulations section 1.512(a)-6 for 

information and transition rules under section 

512(a)(6) for aggregating income from partnerships and debt-financed income from partnerships.

Thus, if an organization is a member of a 

partnership regularly engaged in a trade or 

business that is an unrelated trade or business 

with respect to the organization, the organization must include in its UBTI its share of the 

partnership's gross income from the unrelated 

trade or business (whether or not distributed), 

and the deductions attributable to it. The 

partnership income and deductions to be included in the organization's UBTI are figured the 

same way as any income and deductions from 

an unrelated trade or business conducted directly by the organization. The partnership is required to provide the organization this information on Schedule K-1.

Example. An exempt educational organization is a partner in a partnership that operates 

a factory. The partnership also holds stock in a 

corporation. The exempt organization must include its share of the gross income from operating the factory in its UBTI but may exclude its 

share of any dividends the partnership received 

from the corporation.

Different tax years. If the exempt organization and the partnership of which it is a member 

have different tax years, the partnership items 

that enter into the computation of the organization's UBTI must be based on the income and 

deductions of the partnership for the partnership's tax year that ends within the organization's tax year.

S Corporation Income or 

Loss

An organization that owns S corporation stock 

must take into account its share of the S corporation's income, deductions, and losses in figuring UBTI, regardless of the actual source or nature of the income, deductions, and losses. For 

example, the organization's share of the S corporation's interest and dividend income will be 

taxable, even though interest and dividends are 

normally excluded from UBTI. The organization 

must also take into account its gain or loss on 

the sale or other disposition of the S corporation 

stock in figuring UBTI.

Special Rules for 

Foreign Organizations

The UBTI of a foreign organization exempt from 

tax under section 501(a) consists of the organization's:

1. Unrelated business taxable income derived from sources within the United 

States but not effectively connected with 

the conduct of a trade or business within 

the United States; and

2. Unrelated business taxable income effectively connected with the conduct of a 

trade or business within the United States, 

whether or not this income is derived from 

sources within the United States.

To determine whether income realized by a 

foreign organization is derived from sources 

within the United States or is effectively connected with the conduct of a trade or business 

within the United States, see sections 861 

through 865 and the related regulations.

Special Rules for Social 

Clubs, VEBAs, and SUBs

The following discussion applies to:

• Social clubs described in section 501(c)

(7),

• Voluntary employees' beneficiary associations (VEBAs) described in section 

501(c)(9), and

• Supplemental unemployment compensation benefit trusts (SUBs) described 

in section 501(c)(17).

In general, these organizations are subject to 

the tax on income from unrelated trade or business activities and must apply the rules under 

section 512(a)(6). See Regulations section 

1.512(a)-6 for more information. However, they 

must also must figure UBTI under special rules. 

Unlike other exempt organizations, they can’t 

exclude their investment income (dividends, interest, rents, etc.). (See Exclusions under Income, earlier.) Therefore, they are generally 

subject to unrelated business income tax on 

this income.

The UBTI of these organizations includes all 

gross income, less deductions directly connected with the production of that income, except 

that gross income for this purpose doesn’t include exempt function income. The deduction 

for dividends received by a corporation isn’t allowed in computing UBTI because it isn’t an expense incurred in the production of income.

Losses from nonexempt activities. Losses 

from nonexempt activities of these organizations can’t be used to offset investment income.

Modifications. The UBTI is modified by any 

NOL or charitable contributions deduction and 

by the specific deduction (described earlier under Deductions).

Exempt function income. This is gross income from dues, fees, charges, or similar items 

paid by members for goods, facilities, or services to the members or their dependents or 

guests, to further the organization's exempt purposes. Exempt function income also includes 

income set aside for qualified purposes.

Income that is set aside. This is income 

set aside to be used for religious, charitable, 

scientific, literary, or educational purposes or for 

the prevention of cruelty to children or animals. 

In addition, for a VEBA or SUB it is income set 

aside to provide for the payment of life, sick, accident, or other benefits.

However, any amounts set aside by a VEBA 

or SUB that exceed the organization's qualified 

asset account limit (determined under section 

419A) are unrelated business income. Special 

rules apply to the treatment of existing reserves 

for post-retirement medical or life insurance 

benefits. These rules are explained in section 

512(a)(3)(E)(ii).

Income derived from an unrelated trade or 

business may not be set aside and therefore 

can’t be exempt function income. In addition, 

any income set aside and later spent for other 

purposes must be included in UBTI.

Page 14 Chapter 4 Unrelated Business Taxable Income
Set-aside income is generally excluded from 

gross income only if it is set aside in the tax 

year in which it is otherwise includible in gross 

income. However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside 

in the tax year for which the return was filed. 

The income set aside must have been includible in gross income for that earlier year.

Nonrecognition of gain. If the organization 

sells property used directly in performing an exempt function and purchases other property 

used directly in performing an exempt function, 

any gain on the sale is recognized only to the 

extent that the sales price of the old property 

exceeds the cost of the new property. The purchase of the new property must be made within 

1 year before the date of sale of the old property 

or within 3 years after the date of sale.

This rule also applies to gain from an involuntary conversion of the property resulting from 

its destruction in whole or in part, theft, seizure, 

requisition, or condemnation.

Special Rules for 

Veterans' Organizations

Unrelated business taxable income of a veterans' organization that is exempt under section 

501(c)(19) doesn’t include the net income from 

insurance business that is properly set aside. 

The organization may set aside income from 

payments received for life, sick, accident, or 

health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for 

religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty 

to children or animals. For details, see section 

512(a)(4) and the regulations under that section.

Income From Controlled 

Organizations

The exclusions for interest, annuities, royalties, 

and rents, explained earlier in this chapter under Income, may not apply to a payment of 

these items received by a controlling organization from its controlled organization. The payment is included in the controlling organization's 

UBTI to the extent it reduced the net unrelated 

income (or increased the net unrelated loss) of 

the controlled organization. All deductions of 

the controlling organization directly connected 

with the amount included in its UBTI are allowed.

Excess qualifying specified payments. Excess qualifying specified payments received or 

accrued from a controlled entity are included in 

a controlling exempt organization's UBTI only to 

the extent of the amount that exceeds that 

would have been paid or accrued if the payments had been determined under section 482. 

Qualifying specified payments means any payments of interest, annuities, royalties, or rents 

received or accrued from the controlled organization pursuant to a binding written contract in 

effect on August 17, 2006, or to a contract 

which is a renewal, under substantially similar 

terms of a binding written contract in effect on 

August 17, 2006, and the payments are received or accrued after December 31, 2014.

If a controlled participant isn’t required to file 

a U.S. income tax return, the participant must 

ensure that the copy or copies of the Regulations section 1.482-7 Cost Sharing Arrangement Statement and any updates are attached 

to Schedule M of any Form 5471, Information 

Return of U.S. Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U.S. 

Corporation or a Foreign Corporation Engaged 

in a U.S. Trade or Business, or any Form 8865, 

Return of U.S. Persons With Respect to Certain 

Foreign Partnerships, filed for that participant.

Addition to tax for valuation misstatements. Under section 512(b)(13)(E)(ii), the tax 

imposed on a controlling organization will be increased by 20% of the excess qualifying specified payments that are determined with or without any amendments or supplements to a return 

of tax, whichever is larger. See section 512(b)

(13)(E)(ii) for more information.

Net unrelated income. This is:

• For an exempt organization, its UBTI, or

• For a nonexempt organization, the part of 

its taxable income that would be UBTI if it 

were exempt and had the same exempt 

purposes as the controlling organization.

Net unrelated loss. This is:

• For an exempt organization, its NOL, or

• For a nonexempt organization, the part of 

its NOL that would be its NOL if it were exempt and had the same exempt purposes 

as the controlling organization.

Control. An organization is controlled if:

• For a corporation, the controlling organization owns (by vote or value) more than 

50% of the stock,

• For a partnership, the controlling organization owns more than 50% of the profits or 

capital interests, or

• For any other organization, the controlling 

organization owns more than 50% of the 

beneficial interest.

For this purpose, constructive ownership of 

stock (determined under section 318) or other 

interests is taken into account.

As a result, an exempt parent organization is 

treated as controlling any subsidiary in which it 

holds more than 50% of the voting power or 

value, whether directly (as in the case of a 

first-tier subsidiary) or indirectly (as in the case 

of a second-tier subsidiary).

Income From Property 

Financed With Qualified 

501(c)(3) Bonds

If any part of a 501(c)(3) organization's property 

financed with qualified 501(c)(3) bonds is used 

in a trade or business of any person other than 

a section 501(c)(3) organization or a governmental unit, and such use isn’t consistent with 

the requirements for qualified 501(c)(3) bonds 

under section 145, the section 501(c)(3) organization is considered to have received unrelated 

business income in the amount of the greater of 

the actual rental income or the fair rental value 

of the property for the period it is used. No deduction is allowed for interest on the private activity bond. See sections 150(b)(3) and (c) for 

more information.

Disposition of Property 

Received From Taxable 

Subsidiary and Used in 

Unrelated Business

A taxable 80%-owned subsidiary corporation of 

one or more tax-exempt entities is generally 

subject to tax on a distribution in liquidation of 

its assets to its exempt parent (or parents). The 

assets are treated as if sold at fair market value.

Tax-exempt entities include organizations 

described in sections 501(a), 529, and 115, 

charitable remainder trusts, U.S. and foreign 

governments, Indian tribal governments, international organizations, and similar non-taxable 

organizations.

A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a 

transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the 

transaction as if it sold the assets at fair market 

value. However, such a transfer isn’t taxable if it 

qualifies as a like-kind exchange under section 

1031 or an involuntary conversion under section 1033. In such a case, the built-in appreciation is preserved in the replacement property 

received in the transaction.

A corporation that changes status from taxable to tax-exempt is treated generally as if it 

transferred all of its assets to a tax-exempt entity immediately before the change in status 

(thus subjecting it to the tax on a deemed sale 

for fair market value). This rule doesn’t apply 

where the taxable corporation becomes exempt 

within 3 years of formation, or had previously 

been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is 

to avoid the tax on the change in status.

In the transactions described above, the taxable event is deferred for property that the 

tax-exempt entity immediately uses in an unrelated business. If the parent later disposes of 

the property, then any gain (not in excess of the 

amount not recognized) is included in the parent's UBTI. If there is partial use of the assets 

in unrelated business, then there is partial recognition of gain or loss. Property is treated as 

disposed if the tax-exempt entity no longer uses 

it in an unrelated business.

Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a 

principal purpose of recognizing losses.

Chapter 4 Unrelated Business Taxable Income Page 15
Income From 

Debt-Financed Property

Investment income that would otherwise be excluded from an exempt organization's UBTI 

(see Exclusions under Income, earlier) must be 

included to the extent it is derived from debt-financed property. The amount of income included is proportionate to the debt on the property.

Debt-Financed Property

In general, the term “debt-financed property” 

means any property held to produce income (including gain from its disposition) for which there 

is an acquisition indebtedness at any time during the tax year (or during the 12-month period 

before the date of the property's disposal, if it 

was disposed of during the tax year). However, 

the tax on unrelated debt-financed income under section 514 does not apply to property used 

for an exempt purpose. See Exceptions to 

Debt-Financed Property, later. Sources of unrelated debt-financed income include rental real 

estate, tangible personal property, and corporate stock.

Acquisition Indebtedness

For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization:

1. When acquiring or improving the property,

2. Before acquiring or improving the property 

if the debt would not have been incurred 

except for the acquisition or improvement, 

and

3. After acquiring or improving the property if:

a. The debt would not have been incurred except for the acquisition or improvement, and

b. Incurring the debt was reasonably 

foreseeable when the property was 

acquired or improved.

The facts and circumstances of each situation determine whether incurring a debt was 

reasonably foreseeable. That an organization 

may not have foreseen the need to incur a debt 

before acquiring or improving the property 

doesn’t necessarily mean that incurring the debt 

later wasn’t reasonably foreseeable.

Example 1. Y, an exempt scientific organization, mortgages its laboratory to replace 

working capital used in remodeling an office 

building that Y rents to an insurance company 

for nonexempt purposes. The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, 

would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount 

necessary to continue current operations.

Example 2. X, an exempt organization, 

forms a partnership with A and B. The 

partnership agreement provides that all three 

partners will share equally in the profits of the 

partnership, each will invest $3 million, and X 

will be a limited partner. X invests $1 million of 

its own funds in the partnership and $2 million 

of borrowed funds.

The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. The office building costs the 

partnership $24 million, of which $15 million is 

borrowed from Y bank. The loan is secured by a 

mortgage on the entire office building. By 

agreement with Y bank, X isn’t personally liable 

for payment of the mortgage.

X has acquisition indebtedness of $7 million. 

This amount is the $2 million debt X incurred in 

acquiring the partnership interest, plus the $5 

million that is X's allocable part of the partnership's debt incurred to buy the office building 

(one-third of $15 million).

Example 3. A labor union advanced funds, 

from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding 

company. The subsidiary used the funds to pay 

a debt owed to a third party that was previously 

incurred in acquiring two income-producing office buildings. Neither the union nor the subsidiary has incurred any further debt in acquiring or 

improving the property. The union has no outstanding debt on the property. The subsidiary's 

debt to the union is represented by a demand 

note on which the subsidiary makes payments 

whenever it has the available cash. The books 

of the union and the subsidiary list the outstanding debt as inter-organizational indebtedness.

Although the subsidiary's books show a debt 

to the union, it isn’t the type subject to the 

debt-financed property rules. In this situation, 

the very nature of the title-holding company and 

the parent-subsidiary relationship shows this 

debt to be merely a matter of accounting between the two organizations. Accordingly, the 

debt isn’t acquisition indebtedness.

Change in use of property. If an organization 

converts property that isn’t debt-financed property to a use that results in its treatment as 

debt-financed property, the outstanding principal debt on the property is thereafter treated as 

acquisition indebtedness.

Example. Four years ago a university borrowed funds to acquire an apartment building 

as housing for married students. Last year, the 

university rented the apartment building to the 

public for nonexempt purposes. The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public.

Continued debt. If an organization sells property and, without paying off debt that would be 

acquisition indebtedness if the property were 

debt-financed property, buys property that is 

otherwise debt-financed property, the unpaid 

debt is acquisition indebtedness for the new 

property. This is true even if the original property wasn’t debt-financed property.

Example. To house its administration offices, an exempt organization bought a building 

using $600,000 of its own funds and $400,000 

of borrowed funds secured by a pledge of its 

securities. The office building wasn’t debt-financed property. The organization later sold the 

building for $1 million without repaying the 

$400,000 loan. It used the sale proceeds to buy 

an apartment building it rents to the general 

public. The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment 

building.

Property acquired subject to mortgage or 

lien. If property (other than certain gifts, bequests, and devises) is acquired subject to a 

mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition 

indebtedness even if the organization didn’t assume or agree to pay the debt.

Example. An exempt organization paid 

$50,000 for real property valued at $150,000 

and subject to a $100,000 mortgage. The 

$100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property.

Liens similar to a mortgage. In determining acquisition indebtedness, a lien similar to a 

mortgage is treated as a mortgage. A lien is 

similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. 

However, when state law provides that a lien for 

taxes or assessments attaches to property before the taxes or assessments become due and 

payable, the lien isn’t treated as a mortgage until after the taxes or assessments have become 

due and payable and the organization has had 

an opportunity to eliminate the lien by paying 

the amount it secured in accordance with state 

law. Liens similar to mortgages include (but 

aren’t limited to):

1. Deeds of trust,

2. Conditional sales contracts,

3. Chattel mortgages,

4. Security interests under the Uniform Commercial Code,

5. Pledges,

6. Agreements to hold title in escrow, and

7. Liens for taxes or assessments (other than 

those discussed earlier in this paragraph).

Exception for property acquired by gift, 

bequest, or devise. If property subject to a 

mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by 

the mortgage isn’t treated as acquisition indebtedness during the 10-year period following the 

date the organization receives the property. 

However, this applies to a gift of property only if:

1. The mortgage was placed on the property 

more than 5 years before the date the organization received it, and

2. The donor held the property for more than 

5 years before the date the organization 

received it.

This exception doesn't apply if an organization assumes and agrees to pay all or part of 

the debt secured by the mortgage or makes any 

payment for the equity in the property owned by 

the donor or decedent (other than a payment 

under an annuity obligation excluded from the 

Page 16 Chapter 4 Unrelated Business Taxable Income
definition of acquisition indebtedness, discussed under Debt That Isn’t Acquisition Indebtedness, later).

Whether an organization has assumed and 

agreed to pay all or part of a debt in order to acquire the property is determined by the facts 

and circumstances of each situation.

Modifying existing debt. Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its 

outstanding principal doesn’t increase. When 

the principal of the modified debt is more than 

the outstanding principal of the old debt, the excess is treated as a separate debt.

Extension or renewal. In general, any 

modification or substitution of the terms of a 

debt by an organization is considered an extension or renewal of the original debt, rather than 

the start of a new one, to the extent that the outstanding principal of the debt doesn’t increase.

The following are examples of acts resulting 

in the extension or renewal of a debt:

1. Substituting liens to secure the debt,

2. Substituting obligees whether or not with 

the organization's consent,

3. Renewing, extending, or accelerating the 

payment terms of the debt, and

4. Adding, deleting, or substituting sureties 

or other primary or secondary obligors.

Debt increase. If the outstanding principal 

of a modified debt is more than that of the unmodified debt, and only part of the refinanced 

debt is acquisition indebtedness, the payments 

on the refinanced debt must be allocated between the old debt and the excess.

Example. An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. The organization borrows another $100,000, which isn’t 

acquisition indebtedness, from the same 

lender, resulting in a $600,000 note for the total 

obligation. A payment of $60,000 on the total 

obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x 

$500,000/$600,000) and the excess debt by 

$10,000.

Debt That Isn’t Acquisition 

Indebtedness

Certain debt and obligations aren’t acquisition 

indebtedness. These include the following.

• Debts incurred in performing an exempt 

purpose.

• Annuity obligations.

• Securities loans.

• Real property debts of qualified organizations.

• Certain Federal financing.

Debt incurred in performing exempt purpose. A debt incurred in performing an exempt 

purpose isn’t acquisition indebtedness. For example, acquisition indebtedness doesn’t include the debt an exempt credit union incurs in 

accepting deposits from its members or the 

debt an exempt organization incurs in accepting 

payments from its members to provide them 

with insurance, retirement, or other benefits.

Annuity obligation. The organization's obligation to pay an annuity isn’t acquisition indebtedness if the annuity meets all the following requirements.

1. It must be the sole consideration (other 

than a mortgage on property acquired by 

gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier 

in this chapter) issued in exchange for the 

property received.

2. Its present value, at the time of exchange, 

must be less than 90% of the value of the 

prior owner's equity in the property received.

3. It must be payable over the lives of either 

one or two individuals living when issued.

4. It must be payable under a contract that:

a. Doesn’t guarantee a minimum nor 

specify a maximum number of payments, and

b. Doesn’t provide for any adjustment of 

the amount of the annuity payments 

based on the income received from 

the transferred property or any other 

property.

Example. X, an exempt organization, receives property valued at $100,000 from donor 

A, a male age 60. In return X promises to pay A 

$6,000 a year for the rest of A's life, with neither 

a minimum nor maximum number of payments 

specified. The amounts paid under the annuity 

aren’t dependent on the income derived from 

the property transferred to X. The present value 

of this annuity is $81,156, determined from IRS 

valuation tables. Since the value of the annuity 

is less than 90 percent of A's $100,000 equity in 

the property transferred and the annuity meets 

all the other requirements just discussed, the 

obligation to make annuity payments isn’t acquisition indebtedness.

Securities loans. Acquisition indebtedness 

doesn’t include an obligation of the exempt organization to return collateral security provided 

by the borrower of the exempt organization's 

securities under a securities loan agreement 

(discussed under Exclusions, earlier in this 

chapter). This transaction isn’t treated as the 

borrowing by the exempt organization of the 

collateral furnished by the borrower (usually a 

broker) of the securities.

However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income 

from lending the securities) would be debt-financed income. For this purpose, any payments because of the securities are considered 

to be from the securities loaned and not from 

collateral security or the investment of collateral 

security from the loans. Any deductions that are 

directly connected with collateral security for 

the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned.

Short sales. Acquisition indebtedness 

doesn’t include the “borrowing” of stock from a 

broker to sell the stock short. Although a short 

sale creates an obligation, it doesn’t create 

debt.

Real property debts of qualified organizations. In general, acquisition indebtedness 

doesn't include debt incurred by a qualified organization in acquiring or improving any real 

property. A qualified organization is:

1. A qualified retirement plan under section 

401(a),

2. An educational organization described in 

section 170(b)(1)(A)(ii) and certain of its 

affiliated support organizations,

3. A title-holding company described in section 501(c)(25), or

4. A retirement income account described in 

section 403(b)(9) in acquiring or improving 

real property in tax years beginning on or 

after August 17, 2006.

This exception from acquisition indebtedness doesn’t apply in the following six situations.

1. The acquisition price isn’t a fixed amount 

determined as of the date of the acquisition or the completion of the improvement. 

However, the terms of a sales contract 

may provide for price adjustments due to 

customary closing adjustments such as 

prorating property taxes. The contract also 

may provide for a price adjustment if it is 

for a fixed amount dependent upon subsequent resolution of limited, external contingencies such as zoning approvals, title 

clearances, and the removal of easements. These conditions in the contract 

will not cause the price to be treated as an 

undetermined amount. However, see Note 

1 at the end of this list.

2. Any debt or other amount payable for the 

debt, or the time for making any payment, 

depends, in whole or in part, upon any revenue, income, or profits derived from the 

real property. However, see Note 1 at the 

end of this list.

3. The real property is leased back to the 

seller of the property or to a person related 

to the seller as described in section 267(b) 

or section 707(b). However, see Note 2 at 

the end of this list.

4. The real property is acquired by a qualified 

retirement plan from, or after its acquisition 

is leased by a qualified retirement plan to, 

a related person. However, see Note 2 at 

the end of this list. For this purpose, a related person is:

a. An employer who has employees covered by the plan,

b. An owner with at least a 50% interest 

in an employer described in (a),

c. A member of the family of any individual described in (a) or (b),

d. A corporation, partnership, trust, or 

estate in which a person described in 

(a), (b), or (c) has at least a 50% interest, or

e. An officer, director, 10% or more 

shareholder, or highly compensated 

employee of a person described in 

(a), (b), or (d).

Chapter 4 Unrelated Business Taxable Income Page 17
5. The seller, a person related to the seller 

(under section 267(b) or section 707(b)), 

or a person related to a qualified retirement plan (as described in (4)) provides financing for the transaction on other than 

commercially reasonable terms.

6. The real property is held by a partnership 

in which an exempt organization is a partner (along with taxable entities), and the 

principal purpose of any allocation to an 

exempt organization is to avoid tax. This 

generally applies to property placed in 

service after 1986. For more information, 

see section 514(c)(9)(B)(vi) and section 

514(c)(9)(E).

Note 1. Qualifying sales by financial institutions of foreclosure property or certain conservatorship or receivership property aren’t included in (1) or (2) and, therefore, don’t give rise to 

acquisition indebtedness. For more information, 

see section 514(c)(9)(H).

Note 2. For purposes of (3) and (4), small 

leases are disregarded. A small lease is one 

that covers no more than 25% of the leasable 

floor space in the property and has commercially reasonable terms.

Certain federal financing. Acquisition indebtedness doesn’t include an obligation, to the extent it is insured by the Federal Housing Administration, to finance the purchase, rehabilitation, 

or construction of housing for low or moderate 

income people. 

In addition, acquisition indebtedness 

doesn’t include indebtedness incurred by a 

small business investment company licensed 

under the Small Business Investment Act of 

1958 after October 22, 2004, if such indebtedness is evidenced by a debenture issued by 

such company and held or guaranteed by the 

Small Business Administration. However, this 

provision doesn’t apply to any small business 

investment company during any period that any 

organization which is exempt from tax (other 

than a governmental unit) owns more than 25% 

of the capital or profits interest in such company, or organizations which are exempt from 

tax (including governmental agencies other 

than any agency or instrumentality of the United 

States) own, in the aggregate, 50% or more of 

the capital or profits interest in such company.

Exceptions to Debt-Financed 

Property

Certain property is excepted from treatment as 

debt-financed property.

Property related to exempt purposes. If 

substantially all (85% or more) of the use of any 

property is substantially related to an organization's exempt purposes, the property isn’t treated as debt-financed property. Related use 

doesn’t include a use related solely to the organization's need for income, or its use of the 

profits. The extent to which property is used for 

a particular purpose is determined on the basis 

of all the facts. They may include:

1. A comparison of the time the property is 

used for exempt purposes with the total 

time the property is used,

2. A comparison of the part of the property 

that is used for exempt purposes with the 

part used for all purposes, or

3. Both of these comparisons.

If less than 85% of the use of any property is 

devoted to an organization's exempt purposes, 

only that part of the property used to further the 

organization's exempt purposes isn’t treated as 

debt-financed property.

Property used in an unrelated trade or business. To the extent that the gross income from 

any property is treated as income from the conduct of an unrelated trade or business, the 

property isn’t treated as debt-financed property. 

However, any gain on the disposition of the 

property not included in income from an unrelated trade or business is includible as gross income derived from, or on account of, debt-financed property.

The rules for debt-financed property don’t 

apply to rents from personal property, certain 

passive income from controlled organizations, 

and other amounts that are required by other 

rules to be included in computing UBTI.

Property used in research activities. Property isn’t treated as debt-financed property 

when it produces gross income derived from research activities otherwise excluded from the 

unrelated trade or business tax. See Income 

from research under Exclusions, earlier in this 

chapter.

Property used in certain excluded activities. Debt-financed property doesn’t include 

property used in a trade or business that is excluded from the definition of “unrelated trade or 

business” because:

1. It has a volunteer workforce,

2. It is conducted for the convenience of its 

members, or

3. It consists of selling donated merchandise.

See Excluded Trade or Business Activities in 

chapter 3.

Related exempt uses. Property owned by an 

exempt organization and used by a related exempt organization, or by an exempt organization related to that related exempt organization, 

isn’t treated as debt-financed property when the 

property is used by either organization to further 

its exempt purpose. Furthermore, property isn’t 

treated as debt-financed property when a related exempt organization uses it for research activities or certain excluded activities, as described above.

Related organizations. An exempt organization is related to another exempt organization only if:

1. One organization is an exempt holding 

company and the other receives profits 

derived by the exempt holding company,

2. One organization controls the other as discussed under Income From Controlled Organizations earlier in this chapter,

3. More than 50% of the members of one organization are members of the other, or

4. Each organization is a local organization 

directly affiliated with a common state, national, or international organization that 

also is exempt.

Medical clinics. Real property isn’t debt-financed property if it is leased to a medical clinic 

and the lease is entered into primarily for purposes related to the lessor's exercise or performance of its exempt purpose.

Example. An exempt hospital leases all of 

its clinic space to an unincorporated association 

of physicians and surgeons. They, under the 

lease, agree to provide all of the hospital's outpatient medical and surgical services and to 

train all of the hospital's residents and interns. 

In this case the rents received aren’t unrelated 

debt-financed income.

Life income contract. If an individual transfers property to a trust or a fund with the income 

payable to that individual or other individuals for 

a period not to exceed the life of the individual 

or individuals, and with the remainder payable 

to an exempt charitable organization, the property isn’t treated as debt-financed property. This 

exception applies only where the payments to 

the individual aren’t the proceeds of a sale or 

exchange of the property transferred.

Neighborhood land rule. If an organization 

acquires real property with the intention of using 

the land for exempt purposes within 10 years, it 

will not be treated as debt-financed property if it 

is in the neighborhood of other property that the 

organization uses for exempt purposes. This 

rule applies only if the intent to demolish any existing structures and use the land for exempt 

purposes within 10 years isn’t abandoned.

Property is considered in the neighborhood 

of property that an organization owns and uses 

for its exempt purposes if it is contiguous with 

the exempt purpose property or would be contiguous except for an intervening road, street, 

railroad, stream, or similar property. If it isn’t 

contiguous with the exempt purpose property, it 

still may be in the same neighborhood if it is 

within 1 mile of the exempt purpose property 

and if the facts and circumstances make it unreasonable to acquire the contiguous property.

Some issues to consider in determining 

whether acquiring contiguous property is unreasonable include the availability of land and the 

intended future use of the land.

Example. A university tries to buy land 

contiguous to its present campus, but can’t do 

so because the owners either refuse to sell or 

ask unreasonable prices. The nearest land of 

sufficient size and utility is a block away from 

the campus. The university buys this land. Under these circumstances, the contiguity requirement is unreasonable and not applicable. The 

land bought would be considered neighborhood 

land.

Exceptions. For all organizations other 

than churches and conventions or associations 

of churches, discussed later under Churches, 

the neighborhood land rule doesn’t apply to 

property after the 10 years following its 

Page 18 Chapter 4 Unrelated Business Taxable Income
acquisition. Further, the rule applies after the 

first 5 years only if the organization satisfies the 

IRS that use of the land for exempt purposes is 

reasonably certain before the 10-year period 

expires. The organization need not show binding contracts to satisfy this requirement; but it 

must have a definite plan detailing a specific improvement and a completion date, and it must 

show some affirmative action toward the fulfillment of the plan. This information should be forwarded to the IRS for a ruling at least 90 days 

before the end of the 5th year after acquisition 

of the land. Send information to:

Internal Revenue Service

Attn: CC:PA:LPD:DRU

P.O. Box 120, Ben Franklin Station

Washington, DC 20044

If a private delivery service is used, the address 

is:

Internal Revenue Service

Attn: CC:PA:LPD:DRU, Room 5336

1111 Constitution Ave. NW

Washington, DC 20224

The IRS may grant a reasonable extension of 

time for requesting the ruling if the organization 

can show good cause. For more information, 

contact the IRS.

For any updates to these addresses go 

to IRS.gov/Pub598.

Actual use. If the neighborhood land rule 

doesn’t apply because the acquired land isn’t in 

the neighborhood of other land used for an organization's exempt purposes, or because the 

organization fails to establish after the first 5 

years of the 10-year period that the property will 

be used for exempt purposes, but the land is 

used eventually by the organization for its exempt purposes within the 10-year period, the 

property isn’t treated as debt-financed property 

for any period before the conversion.

Limits. The neighborhood land rule or actual use rule applies to any structure on the land 

when acquired, or to the land occupied by the 

structure, only so long as the intended future 

use of the land in furtherance of the organization's exempt purpose requires that the structure be demolished or removed in order to use 

the land in this manner. Thus, during the first 5 

years after acquisition (and for later years if 

there is a favorable ruling), improved property 

isn’t debt financed so long as the organization 

doesn’t abandon its intent to demolish the existing structures and use the land in furtherance of 

its exempt purpose. If an actual demolition of 

these structures occurs, the use made of the 

land need not be the one originally intended as 

long as its use furthers the organization's exempt purpose.

In addition to this limit, the neighborhood 

land rule and the actual use rule don’t apply to 

structures erected on land after its acquisition. 

They don’t apply to property subject to a business lease (as defined in section 1.514(f)-1 of 

the regulations) whether an organization acquired the property subject to the lease, or 

whether it executed the lease after acquisition. 

A business lease is any lease, with certain 

CAUTION

!

exceptions, of real property for a term of more 

than 5 years by an exempt organization if at the 

close of the lessor's tax year there is a business 

lease (acquisition) indebtedness on that property.

Refund of taxes. When the neighborhood 

land rule doesn’t initially apply, but the land is 

eventually used for exempt purposes, a refund 

or credit of any overpaid taxes will be allowed 

for a prior tax year as a result of the satisfaction 

of the actual use rule. A claim must be filed 

within 1 year after the close of the tax year in 

which the actual use rule is satisfied. Interest 

rates on any overpayment are governed by the 

regulations.

Example. In January 2009, Y, a calendar 

year exempt organization, acquired real property contiguous to other property that Y uses in 

furtherance of its exempt purpose. Assume that 

without the neighborhood land rule, the property 

would be debt-financed property. Y didn’t satisfy the IRS by January 2014 that the existing 

structure would be demolished and the land 

would be used in furtherance of its exempt purpose. From 2014 until the property is converted 

to an exempt use, the income from the property 

is subject to the tax on unrelated business income. During July 2018, Y will demolish the existing structure on the land and begin using the 

land in furtherance of its exempt purpose. At 

that time, Y can file claims for refund for the 

open years 2015 through 2017.

Further, Y also can file a claim for refund for 

2014, even though a claim for that tax year may 

be barred by the statute of limitations, provided 

the claim is filed before the close of 2019.

Churches. The neighborhood land rule as 

described here also applies to churches, or a 

convention or association of churches, but with 

two differences:

1. The period during which the organization 

must demonstrate the intent to use acquired property for exempt purposes is increased from 10 to 15 years, and

2. Acquired property doesn’t have to be in 

the neighborhood of other property used 

by the organization for exempt purposes.

Thus, if a church or association or convention of churches acquires real property for the 

primary purpose of using the land in the exercise or performance of its exempt purpose, 

within 15 years after the time of acquisition, the 

property isn’t treated as debt-financed property 

as long as the organization doesn't abandon its 

intent to use the land in this manner within the 

15-year period.

This exception for a church or association or 

convention of churches doesn’t apply to any 

property after the 15-year period expires. Further, this rule will apply after the first 5 years of 

the 15-year period only if the church or association or convention of churches establishes to 

the satisfaction of the IRS that use of the acquired land in furtherance of the organization's 

exempt purpose is reasonably certain before 

the 15-year period expires.

If a church or association or convention of 

churches can’t establish after the first 5 years of 

the 15-year period that use of acquired land for 

its exempt purpose is reasonably certain within 

the 15-year period, but the land is in fact converted to an exempt use within the 15-year period, the land isn’t treated as debt-financed 

property for any period before the conversion.

The same rule for demolition or removal of 

structures, as discussed earlier in this chapter 

under Limits, applies to a church or an association or a convention of churches.

Computation of 

Debt-Financed Income

For each debt-financed property, the unrelated 

debt-financed income is a percentage (not over 

100%) of the total gross income derived during 

a tax year from the property. This percentage is 

the same percentage as the average acquisition indebtedness with respect to the property 

for the tax year of the property's average adjusted basis for the year (the debt/basis percentage). Thus, the formula for deriving unrelated 

debt-financed income is:

average acquisition

indebtedness

x

gross income

from

debt-financed

property

average adjusted basis

Example. X, an exempt trade association, 

owns an office building that is debt-financed 

property. The building produced $10,000 of 

gross rental income last year. The average adjusted basis of the building during that year was 

$100,000, and the average acquisition indebtedness with respect to the building was 

$50,000. Accordingly, the debt/basis percentage was 50% (the ratio of $50,000 to 

$100,000). Therefore, the unrelated debt-financed income with respect to the building was 

$5,000 (50% of $10,000).

Gain or loss from sale or other disposition 

of property. If an organization sells or otherwise disposes of debt-financed property, it must 

include, in computing UBTI, a percentage (not 

over 100%) of any gain or loss. The percentage 

is that of the highest acquisition indebtedness 

with respect to the property during the 

12-month period preceding the date of disposition, in relation to the property's average adjusted basis.

The tax on this percentage of gain or loss is 

determined according to the usual rules for capital gains and losses.

Debt-financed property exchanged for 

subsidiary's stock. A transfer of debt-financed property by a tax-exempt organization 

to its wholly owned taxable subsidiary, in exchange for additional stock in the subsidiary, 

isn’t considered a gain subject to the tax on unrelated business income.

Example. A tax-exempt hospital wants to 

build a new hospital complex to replace its 

present old and obsolete facility. The most desirable location for the new hospital complex is 

a site occupied by an apartment complex. Several years ago the hospital bought the land and 

apartment complex, taking title subject to a first 

mortgage already on the premises.

For valid business reasons, the hospital proposed to exchange the land and apartment 

Chapter 4 Unrelated Business Taxable Income Page 19
complex, subject to the mortgage on the property, for additional stock in its wholly owned 

subsidiary. The exchange satisfied all the requirements of section 351(a).

The transfer of appreciated debt-financed 

property from the tax-exempt hospital to its 

wholly owned subsidiary in exchange for stock 

didn’t result in a gain subject to the tax on unrelated business income.

Gain or loss on disposition of certain 

brownfield property. Gain or loss from the 

qualifying sale, exchange, or other disposition 

of a qualifying brownfield property (as defined in 

section 512(b)(19)(C)), which was acquired by 

the organization after December 31, 2004, is 

excluded from UBTI and is excepted from the 

debt-financed rules for such property. See sections 512(b)(19) and 514(b)(1)(E).

Average acquisition indebtedness. This is 

the average amount of outstanding principal 

debt during the part of the tax year that the organization holds the property.

Average acquisition indebtedness is computed by determining how much principal debt is 

outstanding on the first day in each calendar 

month during the tax year that the organization 

holds the property, adding these amounts, and 

dividing the sum by the number of months during the year that the organization held the property. Part of a month is treated as a full month in 

computing average acquisition indebtedness.

Indeterminate price. If an organization acquires or improves property for an indeterminate price (that is, neither the price nor the debt 

is certain), the unadjusted basis and the initial 

acquisition indebtedness are determined as follows, unless the organization obtains the IRS's 

consent to use another method:

• The unadjusted basis is the fair market 

value of the property or improvement on 

the date of acquisition or completion of the 

improvement.

• The initial acquisition indebtedness is the 

fair market value of the property or improvement on the date of acquisition or 

completion of the improvement, less any 

down payment or other initial payment applied to the principal debt.

Average adjusted basis. The average adjusted basis of debt-financed property is the average of the adjusted basis of the property as of 

the first day and as of the last day that the organization holds the property during the tax 

year.

Determining the average adjusted basis of 

the debt-financed property isn’t affected if the 

organization was exempt from tax for prior tax 

years. The basis of the property must be adjusted properly for the entire period after the property was acquired. As an example, adjustment 

must be made for depreciation during all prior 

tax years whether or not the organization was 

tax-exempt. If only part of the depreciation allowance may be taken into account in computing the percentage of deductions allowable for 

each debt-financed property, that doesn’t affect 

the amount of the depreciation adjustment to 

use in determining average adjusted basis.

Basis for debt-financed property acquired in corporate liquidation. If an exempt 

organization acquires debt-financed property in 

a complete or partial liquidation of a corporation 

in exchange for its stock, the organization's basis in the property is the same as it would be in 

the hands of the transferor corporation. This basis is increased by the gain recognized to the 

transferor corporation upon the distribution and 

by the amount of any gain that, because of the 

distribution, is includible in the organization's 

gross income as unrelated debt-financed income.

Computation of debt/basis percentage. The 

following example shows how to compute the 

debt/basis percentage by first determining the 

average acquisition indebtedness and average 

adjusted basis.

Example. On July 7, an exempt organization buys an office building for $510,000 using 

$300,000 of borrowed funds. The organization 

files its return on a calendar year basis. During 

the year the only adjustment to basis is $20,000 

for depreciation. Starting July 28, the organization pays $20,000 each month on the mortgage 

principal plus interest. The debt/basis percentage for the year is calculated as follows:

Month

Debt on first day

of each month

property is held

July ..................... $ 300,000

August .................. 280,000

September ................ 260,000

October .................. 240,000

November ................ 220,000

December ................ 200,000

Total $1,500,000

Average acquisition 

indebtedness:

$1,500,000 ÷ 6 months $ 250,000

Basis

As of July 7 ............... $ 510,000

As of December 31 .......... 490,000

Total $1,000,000

Average adjusted basis:

$1,000,000 ÷ 2 $ 500,000 

Debt/basis percentage

 $250,000 ÷ $500,000 = 50%

Deductions for 

Debt-Financed Property

The deductions allowed for each debt-financed 

property are determined by applying the debt/

basis percentage to the sum of allowable deductions.

The allowable deductions are those directly 

connected with the debt-financed property or 

with the income from it (including the dividends-received deduction), except that:

1. The allowable deductions are subject to 

the modifications for computation of the 

UBTI (discussed earlier in this chapter); 

and

2. The depreciation deduction, if allowable, 

is computed only by use of the 

straight-line method.

To be directly connected with debt-financed 

property or with the income from it, a deductible 

item must have proximate and primary relationship to the property or income. Expenses, depreciation, and similar items attributable solely 

to the property qualify for deduction, to the extent they meet the requirements of an allowable 

deduction.

For example, if the straight-line depreciation 

allowance for an office building is $10,000 a 

year, an organization can deduct depreciation 

of $10,000 if the entire building is debt-financed 

property. However, if only half of the building is 

debt-financed property, the depreciation allowed as a deduction is $5,000.

Capital losses. If a sale or exchange of 

debt-financed property results in a capital loss, 

the loss taken into account in the tax year in 

which the loss arises is computed as provided 

earlier. See Gain or loss from sale or other disposition of property under Computation of 

Debt-Financed Income, earlier.

If any part of the allowable capital loss isn’t 

taken into account in the current tax year, it may 

be carried back or carried over to another tax 

year as provided in section 1212 , without application of the debt/basis percentage for that 

year.

Example. X, an exempt educational organization, owned debt-financed securities that 

were capital assets. Last year, X sold the securities at a loss of $20,000. The debt/basis percentage for computing the loss from the sale of 

the securities is 40%. Thus, X sustained a capital loss of $8,000 (40% of $20,000) on the sale 

of the securities. Last year and the preceding 3 

tax years, X had no other capital transactions. 

Under these circumstances, the $8,000 of capital loss may be carried over to succeeding 

years (subject to limitations under section 1212) 

without further application of the debt/basis percentage.

NOL. If, after applying the debt/basis percentage to the income from debt-financed property 

and the deductions directly connected with this 

income, the deductions exceed the income, an 

organization has an NOL for the tax year. This 

amount may be carried over to other tax years 

in the same manner as any other NOL of an organization with UBTI. (For a discussion of the 

NOL deduction, see Modifications under Deductions, earlier in this chapter.) However, the 

debt/basis percentage is not applied in those 

other tax years to determine the deductions that 

may be taken in those years.

Example. Last year, Y, an exempt organization, received $20,000 of rent from a debt-financed building that it owns. Y had no other 

UBTI for the year. The deductions directly connected with this building were property taxes of 

$5,000, interest of $5,000 on the acquisition indebtedness, and salary of $15,000 to the building manager. The debt/basis percentage with 

respect to the building was 50%. Under these 

circumstances, Y must take into account, in 

computing its UBTI, $10,000 (50% of $20,000) 

of income and $12,500 (50% of $25,000) of the 

deductions directly connected with that income.

Page 20 Chapter 4 Unrelated Business Taxable Income
Thus, Y sustained an NOL of $2,500 

($10,000 of income less $12,500 of deductions), which may be carried back or carried 

over to other tax years (as provided in section 

172) without further application of the debt/

basis percentage.

Allocation Rules

When only part of the property is debt-financed 

property, proper allocation of the basis, debt, income, and deductions with respect to the property must be made to determine how much income or gain derived from the property to treat 

as unrelated debt-financed income.

Example. X, an exempt college, owns a 

four-story office building that it bought with borrowed funds (assumed to be acquisition indebtedness). During the year, the lower two stories 

of the building were used to house computers 

that X uses for administrative purposes. The 

two upper stories were rented to the public and 

used for nonexempt purposes.

The gross income X derived from the building was $6,000, all of which was attributable to 

the rents paid by tenants. The expenses were 

$2,000 and were equally allocable to each use 

of the building. The average adjusted basis of 

the building for the year was $100,000 and the 

average acquisition indebtedness for the year 

was $60,000.

Since the two lower stories were used for 

exempt purposes, only the upper half of the 

building is debt-financed property. Consequently, only the rental income and the deductions directly connected with this income are 

taken into account in computing UBTI. The part 

taken into account is determined by multiplying 

the $6,000 of rental income and $1,000 of deductions directly connected with the rental income by the debt/basis percentage.

The debt/basis percentage is the ratio of the 

allocable part of the average acquisition indebtedness to the allocable part of the property's 

average adjusted basis: that is, in this case, the 

ratio of $30,000 (one-half of $60,000) to 

$50,000 (one-half of $100,000). Thus, the debt/

basis percentage for the year is 60% (the ratio 

of $30,000 to $50,000).

Under these circumstances, X must include 

net rental income of $3,000 in its UBTI for the 

year, computed as follows:

Rental income treated as gross income 

from an unrelated trade or business (60% of 

$6,000) ........................... $3,600

Less the allowable portion of 

deductions directly connected with that income 

(60% of $1,000) .....................

600

Net rental income included by X in 

computing its UBTI from debt-financed 

property. ..........................

$3,000

5.

How To Get Tax 

Help

Photographs of Missing Children. The IRS is 

a proud partner with the National Center for 

Missing and Exploited Children. Photographs of 

missing children selected by the Center may 

appear in instructions on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and 

calling 1-800-THE-LOST (1-800-843-5678) if 

you recognize a child.

Phone Help. If you have questions and/or 

need help completing this form, please call 

877-829-5500. This toll-free telephone service 

is available Monday through Friday.

Internet. You can access the IRS website 24 

hours a day, 7 days a week, at IRS.gov to:

• Download forms and publications.

• Order IRS products online.

• Research your tax questions online.

• Search publications online by topic or keyword.

• Use the online Internal Revenue Code 

(IRC), Regulations, or other official guidance.

• View Internal Revenue Bulletins (IRBs) 

published in the last few years.

• Sign up to receive local and national tax 

news by email. To subscribe, visit IRS.gov/

Charities.

Ordering Forms and Publications. Visit 

IRS.gov/FormsPubs to download forms and 

publications. Otherwise, you can go to IRS.gov/

OrderForms to order current and prior-year 

forms and instructions. Your order should arrive 

within 10 business days.

Chapter 5 How To Get Tax Help Page 21
To help us develop a more useful index, please let us know if you have ideas for index entries.

See “Comments and Suggestions” in the “Introduction” for the ways you can reach us. Index

A

Acquisition indebtedness 20

Annuity obligations 17

By gift or bequest of mortgaged 

property 16

Change in property use 16

Continued debt 16

Debt modifying existing 17

Federal financing 18

For performing exempt 

purpose 17

Obligation to return collateral 17

Property subject to mortgage or 

lien 16

Real property 17

Advertising income 12

Agricultural organization 

dues 11

B

Business league dues 11

C

Churches 19

Contributions deduction 13

Convention or trade show 

activity 8

D

Debt-financed property 16

Acquired in liquidation 20

Dues, agricultural organizations 

and business leagues 11

E

Exchange or rental of member 

lists 8

Excluded trade or business 

activities 7

Exclusions 9

Sponsorship 8

Exempt function income 14

Exploitation of exempt activity:

Advertising income 12

Exploitation of exempt 

functions 4

F

Form 990-T 3

I

Income from research 10

L

Limits 19

N

Net operating loss deduction 13

Nonrecognition of gain 15

P

Publications 21

R

Rents 10

Return 3

Royalties 10

S

Specific deduction 13

T

Tax 2

Colleges and universities 2

Deposits 3

Estimated 3

Organizations affected 2

Payment 3

Rates 3

Return 3

Title-holding corporations 3

U.S. instrumentalities 2

Tax Help 21

Title-holding corporations 3

U

Unrelated business:

Hospital laboratory 6

Unrelated business income 9

Advertising income 12

Certain trusts 14

Controlled organizations 15

Debt-financed property 16

Deductions 11

Employees beneficiary 

associations 14

Exclusions 9

Foreign organizations 14

Income from gambling 

activities 7

Income from lending 

securities 10

Modifications 13

Partnership income or loss 14

Products of exempt functions 4

S corporation income 14

S corporation income or loss 14

Social clubs 14

Veterans organizations 15

Unrelated debt-financed 

income 18

Average acquisition 

indebtedness 20

Average adjusted basis 20

Computation 19

Debt/basis percentage 20

Deductions 20

Gains from dispositions 19

Indeterminate property price 20

Unrelated trade or business 4

Artists facilities 4

Broadcasting rights 4

Business league's parking and 

bus services 5

Convenience of members 8

Convention or trade show 8

Directory of members 6

Distribution of low-cost 

articles 8

Dual use facilities, etc. 4

Employees association sales 8

Exclusions 7

Exploitation of exempt 

functions 4

Gambling activities other than 

bingo 7

Halfway house 5

Health club program 5

Hearing aid sales 6

Hospital facilities 5

Hospital services 8

Insurance programs 5

Magazine publishing 5

Member lists rentals, etc. 8

Membership list sales 5

Miniature golf course 5

Museum eating facilities 5

Museum greeting card sales 5

Pet boarding and grooming 

services 6

Pole rentals 8

Public entertainment activity 8

Publishing legal notices 6

Regularly conducted 4

Sales commissions 6

Sales of advertising space 6

School facilities 6

School handicraft shop 6

Selling donated merchandise 9

Selling endorsements 7

Sponsoring entertainment 

events 7

Substantially related 4

Trade or business defined 4

Travel tour programs 7

Volunteer workforce 9

Yearbook advertising 7

Youth residence 7

Unstated trade or business:

Bingo games 7

V

Volunteer fire company 9

W

When to file 3

Page 22 Publication 598 (March 2021)