Unrelated Business Income Tax (UBIT) for Booster Clubs

The Three-Part Test

An activity produces unrelated business income only if all three of these are true, and no exception applies:

1. It is a trade or business. The club sells goods or services to produce income.
2. It is regularly carried on. IRS Publication 598 says activities are regularly conducted if they show frequency and continuity and are pursued like comparable commercial activities. Its examples: a hospital auxiliary’s sandwich stand for two weeks at a state fair is not regular; a commercial parking lot operated every Saturday year-round is.
3. It is not substantially related to the exempt purpose. The activity itself must contribute importantly to the club’s mission. Needing the money does not make an activity related.

Exceptions That Matter to Booster Clubs

Booster Club Activities Through the UBIT Lens

These are general results. The facts of a specific activity, including who works it, how often it runs, and how it is promoted, decide the answer.

Paid Help Changes the Answer

The volunteer exception requires that substantially all the work be unpaid. Publication 598 does not state a percentage. Hiring a concession manager, paying students or adults to staff a stand, or contracting with a vendor to run sales can remove the exception and make the net income taxable.

Credits count as pay. A 2011 IRS memorandum on booster clubs warned that amounts credited to a participant’s account for fundraising could be income from services. A club that “pays” concession workers with credits toward their child’s fees has both a private benefit problem and a UBIT problem. See Private Benefit and Individual Fundraising Accounts.

Advertising Versus Sponsorship

Treasury Regulation 1.513-4 separates acknowledgment from advertising. A sponsor’s name, logo, address, phone number, website, and value-neutral product descriptions are acknowledgment. Messages with qualitative or comparative language, price information, endorsements, or inducements to buy are advertising. Advertising income is business income, taxable when the ad sales are regularly carried on and no exception, such as the volunteer exception, applies. The full rules are on Sponsorships vs Advertising.

Form 990-T

Form 990-EZForm 990-EZThe short annual return a tax-exempt club files with the IRS when its gross receipts are under $200,000 and its total assets are under $500,000, and it does not file Form 990-N. It reports revenue, expenses, the balance sheet, programs, and officers.All terms Part V also asks whether the club had unrelated business gross income of $1,000 or more, and whether it filed Form 990-T.

Example: a club pays two adults to run a weekend snack bar at a community sports complex. Gross receipts are $9,000 and the food cost $3,000, so gross income is $6,000 and Form 990-T is required. Other direct expenses are $2,500, leaving $3,500. After the $1,000 specific deduction, taxable unrelated business income is $2,500, and tax at 21% is $525. Because that exceeds $500, the club should make estimated payments if it expects similar tax the following year.

When Unrelated Business Gets Too Big

A 501(c)(3) must operate primarily for exempt purposes. A small amount of unrelated business, even taxable business, does not threaten exemption. A club whose largest activity becomes a commercial operation unrelated to students risks more than tax; it risks the exemption itself.

Recordkeeping

1. Track each money-making activity as its own line in the books: gross receiptsGross receiptsThe total amounts the club receives from all sources during its fiscal year, without subtracting any costs or expenses. Gross receipts decide which Form 990 the club files.All terms, cost of goods sold, and direct expenses.
2. Keep volunteer sign-up sheets for concessions and sales, showing that the work was unpaid.
3. Keep a copy of every sponsor agreement and ad, so the club can show what was acknowledgment and what was advertising.
4. Review the activity list each year before the annual return is prepared.