A tax-exempt organization is generally exempt from federal corporate income tax on income derived from activities that are substantially related to the organization’s tax-exempt purposes. However, a tax-exempt organization may be subject to a federal corporate income tax on income derived from unrelated trade or business activities. This is known as the Unrelated Business Income Tax (“UBIT”).
An “unrelated trade or business” is any activity that meets all of the following three conditions:
1. The activity must be a trade or business;
2. The trade or business must be regularly carried on; and
3. The trade or business must not be substantially related to the purposes for which the organization was recognized as exempt from federal income tax.
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