Tax-exempt Organizations engaging in social enterprise or other active business pursuits often worry that a growing stream of unrelated business income could threaten their tax-exempt status. This concern is related to the prohibition against tax-exempt organizations engaging in more than an “insubstantial” amount of activity unrelated to their tax-exempt purpose. Unfortunately the term “insubstantial” is undefined. Based on court cases, it appears that gross unrelated business income receipts of 5 percent or less is always safe while over 20% is probably too much.
When unrelated business endeavors take off, the success of the business can threaten a 501(c)(3) organization’s tax-exempt status. To protect their tax-exempt status, many tax-exempt organizations with successful unrelated business ventures move their unrelated business activities into a taxable for-profit subsidiary.
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