Q&A #145 – Does an annual fundraising event trigger unrelated business income tax (UBIT)?
Question: I am the Executive Director of a 501(c)(3) organization that receives a significant amount of revenue comes from selling tickets to our annual fundraising event. Are nonprofit fundraising events exempt from UBIT?
Answer: Unrelated business income tax (UBIT) is not typically owed from the type of annual fundraising events that many nonprofit organizations traditionally hold because most once-per-year events are not considered to be “regularly carried on.” However, the analysis may be more complex for annual events that involve significant efforts and related activities throughout the year.
An activity generally triggers UBIT if it is: (1) “unrelated” to the organization’s tax-exempt purposes; (2) a “trade or business”; and (3) “regularly carried on.” There are also numerous specific UBIT exemptions and exclusions for certain revenue sources, such as many types of investment income, royalties from the licensing of intellectual property, qualified sponsorship payments, and businesses in which substantially all the work is carried out by volunteers (these and other special rules all have unique complexities and nuances).
There is no specific UBIT exemption or exclusion for revenue from annual nonprofit fundraising events, such as selling tickets to a gala, dinner, or awards ceremony held for the purpose of recognizing donors and sponsors, highlighting the organization’s achievements, and inspiring more donations. However annual events like these do not typically trigger UBIT because most once-per-year events are too sporadic to be considered “regularly carried on.”
Pursuant to Treas. Reg. § 1.513-1(c), business activities “will ordinarily be deemed to be regularly carried on if they manifest a frequency and continuity, and are pursued in a manner, generally similar to comparable commercial activities of nonexempt organizations.” This rule is also summarized on this page on the IRS website.
These regulations also state the following regarding annual fundraising events:
“[I]ncome producing or fund raising activities lasting only a short period of time will not ordinarily be treated as regularly carried on if they recur only occasionally or sporadically. Furthermore, such activities will not be regarded as regularly carried on merely because they are conducted on an annually recurrent basis. Accordingly, income derived from the conduct of an annual dance or similar fund raising event for charity would not be income from trade or business regularly carried on.”
However, be aware that in certain situations the time and effort required to organize and promote an event could suggest that the event is “regularly carried on.” For example, in IRS Technical Advice Memorandum 9721001 a series of concerts held over two weekends per year (once in the Spring and once in the Fall) was deemed to be “regularly carried on” where each concert series required up to 6 months to prepare and solicit tickets to the event via an active telemarketing campaign. On the other hand, in IRS Technical Advice Memorandum 9417003, the IRS held that an annual event requiring a 3-month advertising and solicitation campaign was not “regularly carried on.”
Planning Tip – When planning an annual fundraising event, make sure to consider the state and local tax and licensing laws that may apply, particularly if the event is held in a different location each year and/or involves merchandise sales, auctions, raffles, or similar activities. Depending on the laws and processes of the applicable state, city, or municipality, the organization may need to submit foreign, corporation, tax, and charitable solicitation registrations, apply for income and sales tax exemptions, obtain a license or exemption for gaming activities, and more.
Notwithstanding the “regularly carried on” issue, some annual events may also avoid UBIT because the event is considered “related” to the organization’s tax-exempt purposes. This treatment is appropriate in relatively narrow circumstances, but may be worth exploring, particularly if the event is heavily focused on presenting educational content consistent with the organization’s mission.
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