Non-Profit Business Activity and the Unrelated Business Income Tax
In: Tax Policy and the Economy, Volume 13
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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- Sansing, Richard, 1998. "The Unrelated Business Income Tax, Cost Allocation, and Productive Efficiency," National Tax Journal, National Tax Association, vol. 51(2), pages 291-302, June.
- Gary Chamberlain, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 225-238.
- Sansing, Richard, 1998. "The Unrelated Business Income Tax, Cost Allocation, and Productive Efficiency," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 291-302, June.
- 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.
- Joseph J. Cordes & Burton A. Weisbrod, "undated". "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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