Form 990-T is a specialized tax form used by tax-exempt organizations, such as nonprofits, religious institutions, and charities, to report any unrelated business taxable income (UBTI). While these organizations are exempt from federal income tax, they are still required to pay tax on income derived from activities not directly related to their exempt purpose. As such, preparing Form 990-T requires a nuanced understanding of what constitutes unrelated business income, applicable deductions, and compliance requirements.

In 2021, the IRS processed over 1.5 million returns for tax-exempt organizations, highlighting the importance of compliance in this sector. To simplify the process and avoid potential penalties, it is crucial to understand the structure of Form 990-T, the types of income it covers, and the strategies for accurately preparing it.

What Is IRS Form 990-T?

Form 990-T, or the Exempt Organization Business Income Tax Return, is used by tax-exempt organizations to report UBTI and calculate any owed tax. The form is generally required if the organization generates $1,000 or more in unrelated business income during the tax year. While UBTI can come from various sources, the most common examples include:

• Income from rental property not directly related to the organization’s mission
• Advertising revenue in publications
• Certain types of debt-financed income
• Sponsorships from businesses not tied to the organization’s mission

These income sources fall outside the organization’s core purpose, and therefore, they are subject to regular income tax.

Key Components of Form 990-T

Form 990-T has several sections, each essential to calculating the tax owed on UBTI. Key sections include:

1. Identification of the Organization: Basic information about the organization, including name, address, and Employer Identification Number (EIN).
2. Unrelated Business Income: This section requires organizations to report all income from activities unrelated to their exempt mission. Each unrelated business activity must be reported separately, and certain deductions may be allowed to offset this income.
3. Deductions and Adjustments: Here, organizations can list qualified deductions that are directly connected to generating the unrelated income, such as operating expenses, advertising costs, and rental property maintenance.
4. Tax Computation: The total UBTI is calculated after deducting applicable expenses, and the tax rate is then applied to determine the total tax due.

Tax-exempt organizations must file Form 990-T annually if they meet the income threshold, even if no tax is ultimately owed. Additionally, if an organization has overpaid its UBTI tax, it may use this form to request a refund.

Strategies for Preparing Form 990-T

1. Accurately Identify Unrelated Business Income: The first step in preparing Form 990-T is accurately identifying sources of UBTI. Many organizations may unintentionally overlook certain activities, leading to underreporting. For instance, passive income from investments typically isn’t subject to UBTI, but if the income is debt-financed or if certain rules apply, it could be taxable.
2. Organize and Track Business Expenses: UBTI tax liability can often be reduced by deducting expenses directly related to generating that income. Organizations should keep detailed records of all such expenses to maximize allowable deductions. Common deductible expenses include wages, rent, and specific operational costs associated with unrelated activities.
3. Separate Income Streams by Activity: Since the Tax Cuts and Jobs Act (TCJA) of 2017, organizations must report UBTI from each separate business activity individually. Each activity should be documented, categorized, and reported separately to avoid penalties or discrepancies.
4. Leverage Professional Tax Assistance: Navigating the complexities of Form 990-T and UBTI regulations can be challenging. Tax professionals, like those at Private Tax Solutions, are skilled at identifying UBTI, applying eligible deductions, and ensuring compliance with IRS regulations. Consulting with a tax advisor can prevent costly mistakes and streamline the filing process.

Penalties for Non-Compliance

Non-compliance with Form 990-T requirements can result in significant penalties. Organizations that fail to file Form 990-T when required may face penalties ranging from $20 to $105 per day, depending on the organization’s revenue. Furthermore, inaccuracies or underreporting can lead to IRS audits, additional tax liability, and further penalties. Staying compliant with Form 990-T regulations is essential for preserving the tax-exempt status of the organization.

The Growing Role of Form 990-T

The IRS has recently ramped up enforcement of UBTI reporting requirements, leading to a substantial increase in audits for tax-exempt organizations. According to the IRS, audits in the tax-exempt sector increased by 7% in 2021, with a particular focus on organizations with significant UBTI. This trend underscores the importance of accurate and transparent filing.

Additionally, tax-exempt organizations are subject to various state UBTI regulations, which can further complicate the filing process. Arizona and Utah, for example, impose state-level UBTI taxes on exempt organizations, making it essential for organizations in these states to be mindful of both federal and state requirements.

How Private Tax Solutions Can Help

Form 990-T can be complex and requires a clear understanding of UBTI, allowable deductions, and IRS regulations. Private Tax Solutions provides expert assistance tailored to the unique needs of tax-exempt organizations. Our professionals are skilled in navigating UBTI rules, identifying deductible expenses, and ensuring full compliance to minimize tax liability and avoid penalties. By partnering with Private Tax Solutions, organizations can focus on their mission, knowing that their tax responsibilities are in capable hands.