Introduction
Tax-exempt organizations, including nonprofits and charities, frequently navigate the complexities of unrelated business income tax (UBIT), where income from activities unrelated to their exempt purpose can trigger unexpected tax liabilities. Inexperienced tax advisors may fail to account for recent legislative updates, resulting in non-compliance, penalties, or missed opportunities for exemptions. Are you aware of the 2025 modifications under the One Big Beautiful Bill Act that could impact your organization’s UBIT obligations?
At Kewal Krishan & Co, our expert tax advisors help tax-exempt entities save an average of $50,000 annually, potentially accumulating to $1 million over a decade through meticulous compliance and strategic planning. This blog examines the updated UBIT rules for 2025, referencing key Internal Revenue Code (IRC) provisions, with practical examples and steps to ensure adherence. From restrictions on scientific research exemptions to reinstated taxes on fringe benefits, these changes demand proactive review. Secure your organization’s tax-exempt status and minimize liabilities by exploring these insights, linked to Our Tax Planning Services.
Understanding UBIT and 2025 Updates
Unrelated business income tax (UBIT) imposes a tax on income generated by tax-exempt organizations from trades or businesses unrelated to their exempt purposes, as defined under IRC § 511 through § 514. The tax is computed at corporate rates, currently 21% under IRC § 11, and reported on Form 990-T.
For 2025, the One Big Beautiful Bill Act, passed by the House on May 22, 2025, and anticipated to be finalized by July 4, 2025, introduces key updates to UBIT rules for tax-exempt organizations. These include:
- Scientific Research Income Exemption Restriction: Under the revised provisions, income from scientific research is exempt from unrelated business taxable income (UBTI) only if the research results are made publicly available. This narrows the prior broad exemption, aiming to prevent private commercialization without public benefit.
- Reinstated Tax on Parking and Transportation Fringe Benefits: Nonprofits, excluding churches and certain church-affiliated organizations, must now pay UBIT on the value of qualified parking facilities and transportation fringe benefits provided to employees. This tax is assessed at the 21% corporate rate, reinstating a rule from the 2017 Tax Cuts and Jobs Act that was retroactively repealed in 2019.
- Dropped Proposal: The bill omitted a provision from the original draft that would have treated income from the sale or licensing of an organization’s name or logo as UBTI, preserving the status quo for such activities.
These updates apply to tax years beginning after July 4, 2025, subject to final enactment. Organizations must file Form 990-T electronically if UBIT exceeds $1,000, as mandated under IRC § 6033. For comprehensive details, refer to IRS Publication 557 (Rev. January 2025).
Key Forms for Reporting
- Form 990-T: Used to report UBTI and compute tax liability.
- Form 990: Schedules may reference UBIT activities for transparency.
- Form 4720: For excise taxes on certain unrelated activities.
Detailed Example: Applying Updated UBIT Rules
Consider a nonprofit research institute with $1 million in 2025 revenue, including $300,000 from scientific research licensed to a private firm without public disclosure and $50,000 in value from employee parking facilities.
Under prior rules, the $300,000 research income might have been exempt. However, per the 2025 update, since results are not publicly available, it qualifies as UBTI, taxed at 21% ($63,000 liability). The parking benefits add $10,500 in UBIT (21% of $50,000).
Total UBIT: $73,500, reported on Form 990-T. Without compliance, penalties under IRC § 6651 could add 5% per month, up to 25%.
If the institute publishes the research publicly, the $300,000 becomes exempt, reducing liability to $10,500—saving $63,000. For a church-affiliated nonprofit, parking is excluded, eliminating that portion.
Alternative Scenario
If the organization earns $100,000 from logo licensing, it remains non-UBTI under the dropped proposal, avoiding an additional $21,000 tax.
Step-by-Step Guide for Taxpayer Compliance
To align with 2025 UBIT updates and avoid IRS penalties, tax-exempt organizations should follow these steps:
- Review Activities: Identify all income sources and assess if they are unrelated to your exempt purpose per IRC § 513.
- Evaluate Exemptions: For scientific research, ensure results are publicly available to claim exemption; document dissemination.
- Calculate Fringe Benefits: Value parking and transportation benefits per IRS guidelines; exclude if church-related.
- Compute UBTI: Aggregate unrelated income, subtract allowable deductions (IRC § 512), and apply the 21% rate.
- Prepare Forms: Complete Form 990-T electronically if liability exceeds $1,000; attach to Form 990 if applicable.
- File and Pay: Submit by the 15th day of the 5th month after year-end (May 15, 2026, for calendar year), or extend with Form 8868; pay estimated taxes quarterly via Form 990-W if over $500.
- Monitor Updates: Check IRS.gov for final One Big Beautiful Bill Act guidance post-July 4, 2025.
- Retain Records: Maintain documentation of activities, valuations, and public disclosures for at least three years under IRC § 6001.
For multi-state operations, consider Our Cross-Border Tax Services.
Common Pitfalls to Avoid
- Misclassifying Research Income: Failing to make results public triggers UBTI; document accessibility to substantiate exemptions.
- Overlooking Fringe Benefits: Nonprofits often undervalue parking, leading to underreporting and penalties under IRC § 6662.
- Late Filing: Missing electronic Form 990-T deadlines incurs penalties; ensure e-filing compliance.
- Ignoring Silo Rules: Under IRC § 512(a)(6), compute UBTI separately for each trade or business to avoid netting losses improperly.
Why Work with a Tax Expert?
UBIT compliance is intricate, especially with 2025 updates narrowing exemptions and reinstating taxes on benefits. Generic advisors may miss these changes, exposing organizations to audits or overpayments. Kewal Krishan & Co provides specialized guidance for nonprofits, ensuring accurate UBTI calculations and strategic structuring to minimize liabilities under IRC § 511-514. Our proven strategies are detailed in Our Tax Litigation Services.
Conclusion
The 2025 UBIT updates under the One Big Beautiful Bill Act introduce stricter exemptions for scientific research and reinstated taxes on fringe benefits, demanding heightened vigilance from tax-exempt organizations. By adhering to IRC provisions and maintaining robust documentation, you can achieve compliance and mitigate tax exposure. Proactive planning is crucial to safeguarding your mission—review your activities now to stay ahead.
Call to Action
Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to ensure UBIT compliance.
About Our CPA
Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.
Disclaimer
This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.
FAQs
1. What is UBIT?
Tax on unrelated business income of tax-exempt organizations at 21% (IRC § 511).
2. What’s new for scientific research in 2025?
Exempt only if publicly available under One Big Beautiful Bill Act.
3. Do nonprofits pay UBIT on parking?
Yes, at 21%, except churches (2025 update).
4. How to file UBIT?
Electronically on Form 990-T if over $1,000.
5. Can logo licensing be UBTI?
No, proposal dropped in 2025 bill.