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.

Under section 513(a)(1) of the Internal Revenue Code, an activity that otherwise meets the definition of an “unrelated trade or business” does not trigger unrelated business income tax (UBIT) if “substantially all the work in carrying on such trade or business is performed for the organization without compensation.” Having paid staff does not disqualify an organization from using the volunteer exception if paid staff’s role in the activity is sufficiently minimal that the “substantially all” standard is still satisfied.

The sale of t-shirts and other merchandise can, under some circumstances, be considered “related” to an organization’s tax-exempt purpose and therefore avoid unrelated business income tax (UBIT). However, it is necessary to show that the merchandise sales directly further the organization’s mission without regard to how the revenue is used. Only certain types of items will satisfy this standard.

In general, an activity triggers unrelated business income tax (UBIT) if it is: (1) “unrelated” to the organization’s tax-exempt purpose; (2) a “trade or business”; and (3) “regularly carried on.” It is a common misconception that using the revenue from a business activity solely for programs in furtherance of the mission is sufficient to make the activity “related” and thereby avoid UBIT. How an organization uses the funds is irrelevant for UBIT purposes, and a business is not considered “related” unless the activity itself has a substantial causal relationship to the achievement of the organization’s tax-exempt purpose.

The difference between sponsorship (or more precisely, acknowledgment of your corporate sponsors) and advertising is addressed in the unrelated business income tax (“UBIT”) rules. While revenue from advertising typically triggers UBIT, revenue from sponsorship is shielded from UBIT if you adhere to specific rules. The key principle is that the acknowledgment of the sponsor must generally avoid qualitative or comparative descriptions of the sponsor’s business, products, or services.