IRS Publication 598 provides the following specifications:
Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.
- Trade or business: this term generally includes any activity conducted for the production of income from selling goods or performing services. An activity must be conducted with intent to profit to constitute a trade or business.
- Regularly conducted: business activities are ordinarily considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.
- Not substantially related: this determination is met if the trade or business does not contribute importantly to accomplishing the organization’s exempt purpose (in the case of retirement accounts, saving for retirement is the exempt purpose), other than through the production of funds.
- In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve.
- For additional principles used in determining whether activities contribute importantly to the accomplishment of an exempt purpose, please reference IRS Publication 598.
- Generally any business regularly carried on by IRA is unrelated to it’s purpose.
A common example of unrelated business activity, in the context of tax-exempt retirement account investments, is a business that is operated as an LLC or LP because these entities are taxed as a flow-through to the owner. Investments in C-corporations are not included because they are taxed at the corporate level. For more information on why UBIT is required on entity investments within retirement accounts, please visit Why Does my IRA have to Pay UBIT.
Another common example, as detailed in the Real Estate IRAs and UBIT section of the website, is when the retirement account obtains/leverages debt or non-recourse lending to purchase real estate property.
To help determine if UBIT may apply to your situation: UBIT Professional Diagnostic Quiz