UBIT 101:
The Three Prong Test
The Three Prong Test
This three-part framework determines if revenue is UBTI: a trade or business, regularly carried on, and not substantially related to the exempt purpose.
•What is the UBIT three-prong test?
One passive / portfolio income type that is generally excluded from UBTI.
What is interest?
Displaying a sponsor's name/logo with value-neutral info is typically treated as this, not advertising.
What is an acknowledgement?
Passive rent from real property without services is generally treated how for UBIT?
What is excluded from UBTI?
Since 2018, orgs compute UBTI separately for each of these.
What are trades or businesses (silos)?
A university group runs a coffee cart downtown (off-campus) during homecoming week; this activity likely fails to meet this prong.
What is 'regularly carried on'?
A nonprofit thrift store staffed substantially by volunteers relies on this exception to avoid UBIT.
What is the volunteer labor exception?
Using comparatives, price info, or endorsements turns content into this.
What is advertising?
Providing security, box office, A/V, or catering with a facility rental risks turning rent into this.
What is UBTI (services convert rent to service income)?
An NOL from one activity cannot offset income from a different activity because of this rule.
What is IRC Section 512(a)(6)?
A museum gift shop sells jewelry year-round with paid staff; this is likely classified as this.
What is an unrelated business activity?
A thrift store selling donated items typically relies on this exception.
What is the donated goods exception?
A team site shows a sponsor's logo with a 'Shop now for 20% off' link. That sponsorship is generally treated as this.
What unrelated business income?
A sports arena that leases space (real) and equipment (personal) for one price; if personal property rent exceeds 50% of total, this happens to the rent exclusion.
What is the entire rent becomes UBTI?
NOLs that can generally offset aggregate UBTI after silo-level calculations.
What are pre-2018 NOLs?
For 'substantially related,' ask whether the activity does this for the exempt purpose (beyond generating income).
What is 'contributes importantly'?
A qualified sponsorship becomes advertising if you add this type of 'buy now' inducement.
What is a call-to-action?
An exclusivity contract (such as the exclusive beverage provider) may be considered unrelated business income if this is provided by the organization.
What is substantial services provided?
Payments for using your name/logo with no services are typically classified as this.
What are royalties (excluded)?
To group similar revenue streams consistently, organizations should rely on this business classification system.
What is NAICS?