The IRS defines unrelated business income as 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 (IRS Publication 598). The IRS provides further guidance on unrelated business income determination and notes the following questions which must be considered when determining unrelated business income:
- Is it a trade or business?
- Is it regularly carried on?
- Is it not substantially related to furthering the exempt purpose of the organization?
Unrelated business taxable income (“UBTI”) is no stranger to employee benefit plans. It may affect Defined Benefit Plans, Defined Contributions Plans, as well as Health and Welfare Plans. The IRC further defines an unrelated trade or business, as “any trade or business regularly carried on by the trust, a partnership, or an S corporation of which the trust is an investor” (9.16 Thomson Reuters/PPC). This is particularly important to health and welfare plans using a Voluntary Employee Beneficiary Association (“VEBA”) trust. UBTI may affect “any income (less allowable deduction) the plan earns from a regularly carried-on trade or business that is not related to its tax-exempt function as an employee benefit plan is taxed as unrelated income” (206.1 Thomson Reuters/PPC).
So what is UBTI as it relates specifically to employee benefits plans? Although not limited to the items below, UBTI can commonly take the form of:
- Income from property acquired with debt financing (206.4 Thomson Reuters/PPC)
- Income from a plan’s partnership interest if the partnership acquires securities with borrowed funds (206.4 Thomson Reuters/PPC)
- In health and welfare plans specifically, UBTI may result “if the VEBA trust assets exceed the amount reasonably necessary to cover unpaid accrued claims, resulting in the excess accumulations being subject to UBTI.” (9.19 Thomson Reuters/PPC)
Unrelated business income is taxable, however certain exclusions should be considered when considering income. For more information regarding the unrelated business income or employee benefit plans, please contact a Keiter tax professional or a member of the Keiter Employee Benefit Plans niche team.
Read more of our insights on Employee Benefit Plans.
- “206 Unrelated Business Income” Thomson Reuters/Tax & Accounting/PPC.
- “Chapter 9 Plan Tax Status” AICPA Audit and Accounting Guides. Thomson Reuters/Tax & Accounting/PPC.
- “Publication 598 (01/2017), Tax on Unrelated Business Income of Exempt Organizations” IRS.
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