Your 501(c)(3) organization generally is required to pay tax on
income that is not directly related to its exempt purpose —
even if that income is critical to the financial support of the
organization. This unrelated business income (UBI) is
something to watch closely, because if your not-for-profit is ever
audited, the IRS will likely scrutinize your records to see whether
you have accurately reported UBI.
If you have not reported UBI correctly, your organization may be
responsible for back taxes, interest and penalties. And worse, if
the IRS determines that your organization has significantly strayed
from its mission because of UBI-generating activities, your
tax-exempt status could be jeopardized. Fortunately, if you
understand and follow the rules, you can avoid such scenarios.
