With questions about UBIT seemingly on the rise for corporate support, here’s a quick cheat sheet from Greater Public to give you the basics.
What is UBIT?
UBIT stands for Unrelated Business Income Tax. Part of the IRS code, it means that a tax-exempt organization is taxable on gross income derived from a trade or business unrelated to the exempt purposes of the organization, less allowable deductions directly connected with the trade or business.
How does this relate to underwriting?
It comes down to the extent a non-commercial station engages in advertising (as opposed to underwriting). The most common scenarios where UBIT comes into play for public media are:
1) A station opts to allow greater flexibility in recognizing nonprofit clients on-air, akin to “advertising.”
2) Messaging in digital inventory is not regulated by the FCC, so some stations choose to be more flexible with the creative they will accept online.
At what point does UBIT kick in?
While there are some exceptions, three conditions must be present for an exempt organization (i.e. a station) to trigger UBIT:
1. The exempt organization must be engaged in a trade or business. 2. The trade or business must be regularly carried on. 3. The trade or business must be unrelated to the exempt purposes of the exempt organization.
How much is too much?
If more than “an insubstantial amount” of an exempt organization’s activities are directed to non-exempt purposes, its (c)(3) status can be revoked. How is this defined? Check out the archived UBIT webinar to learn more.
How is UBIT calculated?
A nonprofit with more than $1,000 of gross Unrelated Business Income (UBI) must pay income tax on the net amount of UBIT (directly-connected expenses can be deducted). Rates are graduated from 15% to 35%, based on the level of revenues.
Is UBIT worth it?
There’s no universal answer to the question, but here are some pros and cons to consider when contemplating a new line of business (LOB):
New revenue potential
Revenues offset by costs
New revenues may support exempt activities
Digital media not subject to FCC restrictions
New LOB may energize staff
New tax liability
Only for UBI
Efforts may jeopardize exempt status
Digital media are subject to IRS restrictions
New LOB may confuse staff and donors
Who should decide?
It should be a station decision involving, at the very least, station management, general counsel, accounting, and underwriting.