Video: Activities and Income Sources Not Subject to UBI Tax

In this lesson, discover which activities and income sources are exempt from unrelated business income (UBI) tax for tax-exempt organizations. Nick dives into specific scenarios where the typical UBI regulations do not apply, such as when activities are carried out by unpaid volunteers or for the rehabilitation of disabled persons. He also sheds light on the sale of merchandise received as contributions and the special rules for games of chance used in fundraising. Understanding that not all income streams lead to UBI, Nick also unwraps the nuances of passive income sources, including dividends, interest, and annuities, as well as the specific conditions under which rental income can be free of UBI tax. The lesson clarifies these exemptions with practical explanations, ensuring a thorough grasp of how they align with an organization's mission and support their charitable or educational purpose.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Here are some activities that are not subject to UBI because, we'll see, they align with the purpose or mission of the organization, or they involve specific circumstances that exclude them from being classified as UBI. Here are some examples, said they are not subject to the tax. First off, activity where substantially all the work is performed by unpaid volunteers. So that is something to know. And just a note here quickly, the difference between this slide and the next one is that the other income sources, those are other income sources, where these are activities. It's the same deal, so we'll see that. It's the slide after, no worries. But this is going to be activities, not subject to UBI, where the next slide is specifically just income source, or more generally, I guess, just income sources. So activity where all the work is performed by unpaid volunteer workers, this is not gonna be taxed. When a tax-exempt org conducts a business activity, primarily relying on unpaid volunteers, the income generated is not considered unrelated business income. This exemption recognizes that the activity is more closely related to the organization's mission, as it relies on volunteer support rather than a profit-driven motive. So if you've got like the Cats and Dogs organization, you've got people, unpaid volunteers selling the cupcakes, that's not gonna be taxed, even if it's, let's say, $3,000, $4,000, which is above that $1,000 amount. Or you do a car wash to raise money, but it's unpaid volunteers. Next, the income generated from activities conducted by disabled persons, the activities being a part of their rehabilitation. If you are doing this activity because you wanna teach these people who are disabled how to have a job in the real world, this is not gonna be

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