Unrelated business income tax returns, 2000, with a decade in review, 1991-2000

Statistics of Income Bulletin, Spring, 2004 by Margaret Riley

The number of nonprofit organizations filing Form 990-T, Exempt Organization Business Income Tax Return, declined between Tax Years 1999 and 2000, from 42,151 to 38,567, the second consecutive year that the number of filings fell. Organizations reporting "unrelated business income" (UBI) filed 9 percent fewer returns for 2000. Returns with gross UBI of $10,000 or less, the threshold for exemption from filing return schedules and reporting detailed information on deductions, decreased by 15 percent; those with gross UBI over $10,000 decreased by 4 percent. The section, "Fluctuations in Form 990-T Filings," which appears later in this article, discusses annual changes in the number of returns filed from 1991-2000 and how they were influenced by the type of filer and size of gross UBI.

Even though 9 percent fewer returns were filed for 2000, aggregate gross UBI rose by 9 percent, amounting to $8.4 billion. However, the percentage changes between 1999 and 2000 in the amount of gross UBI reported by organizations in the smaller and larger gross UBI size classes mentioned above were -13 percent and +9 percent, respectively. Organizations reporting gross UBI over $10,000 represented 61 percent of Form 990-T fliers, and were responsible for 99 percent of total gross income.

After offsetting total gross UBI with $7.7 billion of deductions, the resulting unrelated business taxable income (less deficit) for 2000 was $0.7 billion. Organizations reporting unrelated business (positive) taxable income numbered 19,336, about half of all fliers, and taxable income dropped by 4 percent from that reported for 1999. Both the unrelated business income tax and total tax (which takes into account certain credits and other taxes) also dropped by 4 percent. In addition to the declines in total taxable income and taxes, aggregate unrelated business deficits grew by 20 percent. Figure A contains the major financial statistics cited above, plus other selected data from Forms 990-T filed for Tax Years 1999 and 2000.

Background

Definition of Unrelated Business Income

Nonprofit organizations that are granted Federal tax exemption based on their mission-related purposes are allowed, within certain limits, to generate income from unrelated business activities; however, the income from these activities is subject to taxation. Unrelated business income is produced from an activity that is both conducted on a regular basis and not directly related to an organization's tax-exempt mission. The fact that the income may be used for furthering an organization's exempt purposes does not alter the definition [1]. Any profits from an organization's unrelated business activities are taxed at regular corporate or trust income tax rates [2]. There are certain exclusions to this income taxation; some examples are engaging in business activities in which substantially all of the work is performed by volunteer labor; selling merchandise that the organization received as a gift or contribution; and operating certain games of chance, as specified in the Internal Revenue Code (IRC).

Form 990-T Requirements

Organizations that are described in IRC sections 220(e), 401(a), 408(e), 408A, 501(c)(2)-(27), 529(a), and 530(a) must file a Form 990-T if they received $1,000 or more of gross income from business activities that were considered unrelated to the purposes for which they received tax-exempt status. (The various types of tax-exempt organizations subject to the unrelated business income tax provisions are described by Code section in the Appendix to this article.) IRC section 501(d) religious and apostolic organizations, farmers' cooperatives, and section 4941(a)(1) "nonexempt charitable trusts" report taxes on forms other than Form 990-T.

Most tax-exempt organizations are required to file an annual Form 990, Return of Organization Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt From Income Tax (used by organizations with annual gross receipts of less than $100,000 and total end-of-year assets of less than $250,000) [3]. The Form 990-T is required only for a tax year in which an organization has unrelated business income. While specific taxpayer information reported on an exempt organization's Form 990/990-EZ "information return" can be disclosed to the public, specific taxpayer information reported on its Form 990-T "tax return" cannot. Under disclosure rules governing the release of taxpayer information, only aggregate totals from Form 990-T can be presented in this article.

The Internal Revenue Service required organizations having accounting periods beginning in 2000 (and, therefore, ending between December 2000 and November 2001, for full-year return fliers) to file a 2000 Form 990-T to report unrelated business income of $1,000 (the filing threshold) or more. The associated required due dates for filing Tax Year 2000 Forms 990-T generally spanned May 2001 to April 2002, but extensions of time to file beyond this period routinely were granted to many organizations. For all Internal Revenue Code (IRC) section 220(e), 40 l(a), 408(e), 408A, and 530(a) trusts, the required accounting period was Calendar Year 2000, and the filing date was April 15, 2001. Corresponding to the required filing dates, the Tax Year 2000 study sample was drawn from Forms 990-T processed by IRS throughout Calendar Years 2001 and 2002. (See the Data Sources and Limitations section of this article for detailed information on the study sample.) Because of the various accounting periods of the organizations filing a 2000 return, the financial activities covered in this article span the period January 2000 through November 2001, although the majority of activities occurred during Calendar Year 2000.