Is the Income Really Tax-Exempt

Most PTA (non-profit) fund-raising activities are exempt from federal income taxes because of the following:

• They are conducted only once per year, or
• Eighty-five percent (85%) of the work of the activity is conducted by volunteers, or
• They consist of selling donated merchandise (e.g., a silent or live auction of donated merchandise).

Judgment is made on a case-by-case basis whether an activity is related or unrelated.

The federal, state, and local government may have different standards for pursuing the charge of UBI although most state and local governments follow the federal rules.

What is unrelated business income (UBI)?

For an activity to be classified as yielding unrelated business income, three factors must be present: The income or activity must be (1) from a business, (2) regularly carried on, and (3) unrelated to the organization’s exempt purpose.

1. From a trade or business

• To be considered a business, the nonprofit must take an active role in the generation of the income from an activity.
• The activity must provide income, but does not have to produce a profit.
  

2. Regularly carried on

• IRS regulations state that activities that are carried on only “discontinuously or periodically” will not be considered to be regularly carried on.
• If activities are of short duration, but follow-up or preparation is carried on over a long period, it could be UBI.
• An activity occurring only once per year may be considered UBI if a commercial company performing the same activity would also be active only once a year.

3. Unrelated to the organization’s tax-exempt purpose

• If an activity is not substantially related to the PTA’s mission, then it could be considered unrelated to fulfilling the exempt purpose of the PTA.
• It is important to remember that the substantial relation to the PTA’s exempt purpose cannot come solely from the PTA’s need for money. The destination or use of the income has no bearing on determining if it is unrelated business income. This determination is made by how the income is earned.