Unrelated business income, in plain terms

Exemption covers income from an organization's exempt activities. Income from a trade or business that is regularly carried on and is not substantially related to the organization's purpose is different. It is called unrelated business income, and it can be taxable.

All three parts of the test have to be met. A one-time bake sale is not regularly carried on. A museum gift shop selling reproductions of its collection is related to its educational purpose. A charity that runs a year-round parking lot for a nearby stadium probably meets all three.

The law also carves out common exceptions. Businesses run substantially by volunteers, sales of donated merchandise such as a thrift shop, and activities carried on mainly for the convenience of members, students, or staff are generally excluded. Qualified sponsorship payments are not unrelated business income either, while paid advertising can be.

An organization with $1,000 or more in gross unrelated business income must file Form 990-T. If a new revenue idea looks like a business, ask an accountant about it before you launch.