IRS Form 990-T: Understanding Tax Filing Requirements for Exempt Organizations
Nonprofit organizations enjoy tax-exempt status under Section 501(c) of the Internal Revenue Code, which allows them to operate without paying federal income tax on most of their revenue. However, exempt organizations must still comply with certain tax requirements when they earn income from activities unrelated to their tax-exempt purposes. This is where IRS Form 990-T comes into play.
IRS Form 990-T is used by tax-exempt organizations to report and pay taxes on unrelated business income (UBI). If your nonprofit organization generates income from activities that are not substantially related to its exempt purpose, you may need to file this form to report and pay tax on that income.
In this post, we’ll dive deep into the purpose of IRS Form 990-T, what it entails, and how your nonprofit can stay compliant with IRS tax regulations.
What is IRS Form 990-T?
IRS Form 990-T is an informational tax return that tax-exempt organizations use to report income from activities that are not related to their primary exempt purposes. Nonprofits typically receive tax-exempt status under Section 501(c)(3) (for charitable organizations) or similar sections, which means they don’t have to pay federal income tax on the revenue they generate from their tax-exempt activities. However, if they earn income from activities that do not align with their exempt purposes, such as operating a business or leasing property, that income may be subject to tax.
The IRS considers income from activities unrelated to the nonprofit’s primary purpose to be unrelated business income (UBI). Form 990-T is used to report that income and calculate the tax owed on it. The tax rate on unrelated business income is generally 21%, which is the corporate tax rate.
Who Needs to File IRS Form 990-T?
Not every tax-exempt organization needs to file IRS Form 990-T. You are only required to file if:
- Your organization generates $1,000 or more in gross income from unrelated business activities in a tax year.
- You have any unrelated business income, regardless of the amount, and are required to report it under IRS rules.
Even if your nonprofit earns less than $1,000 from unrelated business activities, the IRS still requires you to file the form. If your organization earns more than $1,000 in unrelated business income, filing IRS Form 990-T is mandatory.
What Constitutes Unrelated Business Income (UBI)?
The IRS defines unrelated business income as income derived from activities that:
- Are conducted regularly
- Are not substantially related to the organization’s exempt purpose
- Generate income that is used for the organization’s tax-exempt purposes
For example, if a nonprofit runs a bookstore selling items that are not related to its exempt purpose, the income from those sales would likely be classified as UBI. Similarly, if the nonprofit rents out space for events unrelated to its charitable mission, the rental income could also qualify as UBI.
However, some income is excluded from UBI, such as:
- Income from activities that are substantially related to the organization’s exempt purpose.
- Donations and grants.
- Certain investment income, like dividends and interest.
- Income from activities where the IRS provides specific exemptions, such as revenue from volunteer-run activities or income from qualified sponsorships.
Understanding what qualifies as UBI is crucial for determining whether or not you need to file Form 990-T and pay tax on that income.
Key Sections of IRS Form 990-T
IRS Form 990-T consists of several parts, each focusing on different aspects of the tax return:
1. Part I: Income and Deductions
In Part I, the organization reports its unrelated business income, including gross income from unrelated activities and the associated deductions. You’ll need to list all income from unrelated business activities, such as profits from business operations, rent from unrelated property, or royalties from intellectual property.
Additionally, any allowable deductions related to the generation of this income (e.g., expenses for operating the business) are also reported here.
2. Part II: Tax Computation
After calculating your unrelated business income, Part II is used to calculate the tax owed. The tax rate is typically 21% of your UBI. This section also includes adjustments and credits that might reduce the amount of tax due, such as net operating losses carried forward from previous years.
3. Part III: Other Information
This section includes questions and additional information related to the nonprofit’s unrelated business activities. This section asks for more detailed information, such as the nature of the unrelated business activities, whether the organization has conducted any unrelated business activities during the year, and whether it has been exempt from paying tax on specific types of income.
4. Schedule A: Apportionment of Unrelated Business Income
Schedule A may be required for organizations that have income derived from multiple unrelated business activities. This schedule helps allocate income and deductions to each specific activity, providing a clearer picture of what portion of your total income is considered unrelated business income.
How to File IRS Form 990-T
Filing IRS Form 990-T can be done in a few steps:
- Gather Necessary Information: Collect all the financial records related to your organization’s unrelated business income. This includes revenue from business operations, rental income, and any associated expenses.
- Complete Form 990-T: Fill out all relevant sections of Form 990-T, including income, deductions, tax calculations, and other information related to unrelated business activities.
- Submit the Form: Form 990-T is typically filed electronically through the IRS e-file system. However, if you prefer, you can submit the form by mail. Be sure to file by the deadline, which is the 15th day of the 5th month after the end of your nonprofit’s fiscal year.
- Pay Any Taxes Due: If your organization owes taxes on unrelated business income, make sure to pay the amount by the filing deadline to avoid penalties and interest.
Penalties for Failing to File Form 990-T
Failure to file IRS Form 990-T or pay taxes on unrelated business income can result in penalties. The IRS may impose a penalty for failure to file, which is typically based on the amount of tax owed. Additionally, if your organization fails to file the form on time, the IRS may also impose late payment penalties.
Conclusion
IRS Form 990-T is an essential tax form for tax-exempt organizations that generate unrelated business income. Filing this form ensures that your nonprofit complies with federal tax laws and pays any taxes owed on income from non-exempt activities. By understanding the purpose of Form 990-T, identifying what qualifies as unrelated business income, and completing the form correctly, you can protect your organization from penalties and remain compliant with IRS regulations.
If your nonprofit generates unrelated business income, it’s important to stay informed about the filing requirements for Form 990-T. Regularly review your activities to ensure proper reporting and make sure your nonprofit remains in good standing with the IRS.
