UBIT Rules Every Church Must Know

UBIT Rules Every Church Must Know — How “Unrelated Business Income” Can Cost You Your 501(c)(3) (2025)

Not all income earned by a church or ministry is tax-free.
When a nonprofit regularly earns revenue from activities unrelated to its religious purpose—such as parking fees, coffee sales, or website advertising—those profits can trigger the Unrelated Business Income Tax (UBIT).
This 2025 guide explains what counts as “unrelated business,” which exceptions still apply, and how to avoid IRS penalties that could endanger your 501(c)(3) status.

1️⃣ What Is UBIT?

Under IRC §511–514, tax-exempt organizations—including churches—must pay income tax on profits from activities that are unrelated to their exempt purpose.
The rule prevents nonprofits from gaining an unfair advantage over for-profit businesses.
While worship services, Bible studies, and charitable programs are exempt, running a business like a café or renting debt-financed property is not.

EA Tax Tip 💬
The IRS doesn’t care how the money is used—only how it’s earned.
Even if your church spends all profits on missions, income from a non-religious trade may still be taxable :contentReference[oaicite:1]{index=1}.

2️⃣ The Three-Part IRS Test

For an activity to trigger UBIT, all three conditions must be met :contentReference[oaicite:2]{index=2}:

It’s a trade or business → a regular activity conducted to produce income from goods or services.
It’s regularly carried on → frequent or continuous like a commercial enterprise, not occasional fundraisers.
It’s not substantially related → the activity doesn’t advance the organization’s religious, educational, or charitable mission.

Example 💡
☕ A church operates a weekday coffee shop open to the public, run by paid staff, not volunteers.
➜ Because it’s ongoing, commercial, and unrelated to worship, its profits are taxable under UBIT.

However, if any one of these elements is missing—say, the activity is volunteer-run or tied directly to outreach—the income remains exempt.

3️⃣ Common Examples (and Exceptions)

💼 Advertising & Sponsorships

Selling ad space in bulletins, livestreams, or on the church website usually counts as unrelated business income.
In contrast, a “qualified sponsorship” (e.g., “This event is sponsored by Smith Hardware”) is exempt if the sponsor receives no promotional benefit beyond name recognition.

🎰 Gaming & Raffles

Bingo and raffles may trigger UBIT when run like a business.
Traditional bingo may qualify for a special exemption if:
(1) it’s the classic paper-card style,
(2) no commercial operators run it locally, and
(3) it doesn’t violate state law.

📰 Merchandise & Publications

Selling books, T-shirts, or event merchandise unrelated to the church’s mission can create taxable income.
But publications that teach doctrine or raise spiritual awareness remain exempt.

🏠 Rental Property

Rent from real property is normally exempt, but not if the property is debt-financed (mortgaged).
If personal services—like catering or janitorial work—are bundled into the rental, that portion is taxable.

🚗 Parking Lots

Parking fees for members attending services are exempt.
Renting the lot to the general public on weekdays is taxable business income unless the lot is leased (not operated) to another party at fair-market rent :contentReference[oaicite:3]{index=3}.

Example 💡
🅿️ A downtown church rents weekday spaces to office workers for $100 per month.
Because the use is commercial and ongoing, it’s UBIT.
If the church instead leases the lot to a third-party operator and collects fixed rent, the income is exempt.

🎟️ Fundraisers & Volunteers

Activities staffed entirely by volunteers—like bake sales or youth car washes—are excluded from UBIT.
So are events conducted mainly for the convenience of members (e.g., a church bookstore serving the congregation).

💰 Interest, Dividends & Royalties

Passive investment income is generally exempt unless debt-financed.
Royalties from licensing church music or publications remain tax-free if not tied to services rendered.

EA Tax Tip 💬
IRS Publication 598 lists 14 exceptions to UBIT, but churches should document volunteer hours and member use to support exemption claims (IRS Pub 598).

4️⃣ Filing Requirements & Form 990-T

A church or ministry with $1,000 or more in gross income from an unrelated trade or business in any tax year must file Form 990-T, Exempt Organization Business Income Tax Return.
The due date is the 15th day of the 5th month after the fiscal year end (May 15 for calendar-year organizations).

Separate 990-T required if the church has its own EIN, even under a diocese or denominational umbrella.
Parishes and local units get a $1,000 specific deduction under IRC §512(b)(12).
Tax must be paid using EFTPS or Form 990-W if estimated taxes apply.

Example 💡
A church café earns $8,000 profit. After $1,000 deduction, $7,000 is subject to UBIT at the corporate rate (21%).
The church must file Form 990-T and may also need state UBIT returns.

IRS Publication 557 and Form 990-T instructions provide full details on how to compute unrelated business taxable income (IRS Form 990-T Page).

5️⃣ How to Avoid UBIT Problems

Use volunteers whenever possible — volunteer labor can fully exempt an activity.
Separate records — track expenses and income for each activity to prove mission connection.
Review debt-financing — avoid borrowing to buy property solely for rental or business use.
Lease instead of operate — fixed-rent leases usually stay exempt, while direct operations create UBIT.
Document intent — minutes or policy notes showing that income supports ministry programs help defend exemption.

EA Tax Tip 💬
If in doubt, file Form 990-T and pay minimal UBIT rather than risk IRS scrutiny that could endanger your 501(c)(3).
Transparency is always safer than silence.

💬 Frequently Asked Questions

Q1. Does a church bookstore create UBIT?
🕊️ Only if the store sells mainly commercial items unrelated to faith (e.g., souvenirs or non-religious books).
Sales of Bibles or study guides for members are exempt.

Q2. Are wedding-facility fees taxable?
💒 If the service is part of the religious function and uses church staff or sacraments, it’s related and exempt.
Renting space commercially for non-members is UBIT.

Q3. What about YouTube ad revenue from sermons?
🎥 If ads play automatically and the church doesn’t control them, they’re usually incidental.
But actively selling sponsorships or product placements creates taxable advertising income.

Q4. Can UBIT jeopardize our tax-exempt status?
⚠️ Yes—if unrelated activities become “substantial” or primary.
Occasional UBIT is fine; running a business disguised as a ministry is not.

Reference Links

📗 Church & Ministry Tax Series (2025)

⬆️ Back to Top

Part 4: UBIT Rules Every Church Must Know — How “Unrelated Business Income” Can Cost You Your 501(c)(3)