Tax Exempt Status & Unrelated Business Income

Most PTAs are exempt from federal income tax under Section 501(c)(3) of the IRC and further defined as a public charity (not a private foundation).

Tax-exempt status means that the PTA does not pay federal income tax on income from activities that are substantially related to the purpose for which the PTA was given exempt status. However, the PTA may be required to pay tax on other types of income, referred to as unrelated business income (UBI).

The law requires non-profits to

• Report unrelated business activities when gross receipts are at least $1,000 by filing IRS Form 990-T
• Pay taxes on net (after expenses) receipts

Non-profits risk losing their tax-exempt status only if such activities become the primary focus and make the tax-exempt mission secondary.

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.