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Non-Profit Business Activity and the Unrelated Business Income Tax

In: Tax Policy and the Economy, volume 13

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  • James R. Hines Jr.

Abstract

American nonprofit organizations are generally exempt from federal income tax, with the exception that profits earned from activities that are subject to the Unrelated Business Income Tax (UBIT). The UBIT is intended to prevent nonprofits and taxable for-profit firms, and also to prevent erosion of the federal tax base through tax-motivated transactions between taxable and tax-exempt entities. The evidence indicates that American nonprofit organizations engage in very little unrelated business activity, paying aggregate UBIT of less than $200 million annually. Large nonprofit organizations, and those with pressing financial needs due to high program-related expenses and low receipts of contributions and government grants, are the most likely to have unrelated business income. The same organizational characteristics are not associated with earning income from inventory sales that are nonprofits incur important organizational costs in undertaking unrelated business activity, since unrelated business income is concentrated among organizations facing the strongest financial pressures. This, in turn, carries implications for the efficiency of the UBIT as a source of tax revenue and for the need to tax the business income of nonprofit organizations in order to prevent

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This chapter was published in:

  • James Poterba, 1999. "Tax Policy and the Economy, volume 13," NBER Books, National Bureau of Economic Research, Inc, number pote99-2.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10921.

    Handle: RePEc:nbr:nberch:10921

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    1. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 225-38, January.
    2. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
    3. Joseph J. Cordes & Burton A. Weisbrod, . "Differential Taxation of Nonprofits and the Commercialization of Nonprofit Revenues," IPR working papers 97-15, Institute for Policy Resarch at Northwestern University.
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    Cited by:
    1. Mihir A. Desai & Robert J. Yetman, 2005. "Constraining Managers without Owners: Governance of the Not-for-Profit Enterprise," NBER Working Papers 11140, National Bureau of Economic Research, Inc.

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