The Unrelated Business Income Tax: All Bark and No Bite?

Nonprofit organizations engage in a range of income-producing activities: Universities charge tuition, hospitals collect fees, and social-service organizations enter into government contracts. To the extent that an activity is "substantially related" to the organization's tax-exempt purpose, the income is tax-free (and the associated expenses are, essentially, not deductible). By contrast, net income from "unrelated business activities", is subject to the Unrelated Business Income Tax (UBIT), which generally taxes such income at ordinary corporate (or trust) tax rates. Congress, however, has exempted dividends, interest, rents, and royalties from the UBIT.