Unrelated Business Income Tax Return
Even though an organization is recognized as tax exempt, it still
may be liable for tax on its unrelated business income. Unrelated
business income is income from a trade or business, regularly carried
on, that is not substantially related to the charitable, educational,
or other purpose that is the basis for the organization's exemption.
An exempt organization that has $1,000 or more of gross income from an
unrelated business must file Form 990-T.
The obligation to file Form 990-T is in addition to the
obligation to file the annual information return, Form 990,
990-EZ, or 990-PF.
Exempt organizations must make quarterly payments of estimated tax
on unrelated business income. An organization must make estimated tax
payments if it expects its tax for the year to be $500 or more.
Travel tour programs.
Travel tour activities that are a trade or business are an
unrelated trade or business if the activities are not substantially
related to the purpose to which tax exemption was granted to the
Whether travel tour activities conducted by an organization are
substantially related to the organization's tax exempt purpose is
determined by looking at all the relevant facts and circumstances,
including, but not limited to, how a travel tour is developed,
promoted, and operated.
ABC, a university alumni association, is tax exempt as an
educational organization under section 501(c)(3) of the Code. As part
of its activities, ABC operates a travel tour program. The program is
open to all current members of ABC and their guests. ABC works with
travel agents to schedule approximately ten tours annually to various
destinations around the world. Members of ABC pay $1,000 to XYZ Travel
Agency to participate in a tour. XYZ pays ABC a per person fee for
each participant. Although the literature advertising the tours
encourages ABC members to continue their lifelong learning by joining
the tours, and a faculty member of ABC's related university frequently
joins the tour as a guest of the alumni association, none of the tours
include any scheduled instruction or curriculum related to the
destinations being visited. The travel tours made available to ABC's
members do not contribute importantly to the accomplishment of ABC's
educational purpose. Rather, ABC's program is designed to generate
revenues for ABC by regularly offering its members travel services.
Therefore, ABC's tour program is an unrelated trade or business.
For additional information on unrelated business income, see
Employment Tax Returns
Every employer, including an organization exempt from federal
income tax, who pays wages to employees is responsible for
withholding, depositing, paying, and reporting federal income tax,
social security and Medicare (FICA) taxes, and federal unemployment
tax (FUTA), unless that employer is specifically excepted by law from
those requirements or if the taxes clearly do not apply.
For more information, get a copy of Publication 15, Circular E,
Employer's Tax Guide, which summarizes the responsibilities
of an employer, Publication 15-A, Employer's Supplemental
Tax Guide, and Form 941, Employer's Quarterly Federal Tax
If any person required to collect, truthfully account for, and pay
over any of these taxes willfully fails to satisfy any of these
requirements or willfully tries in any way to evade or defeat any of
them, that person will be subject to a penalty. The penalty, often
called the trust fund recovery penalty is equal to the tax
evaded, not collected, or not accounted for and paid over. The term
- An officer or employee of a corporation, or
- A member or employee of a partnership.
The penalty is not imposed on any unpaid volunteer director or
member of a board of trustees of an exempt organization if the unpaid
volunteer serves solely in an honorary capacity, does not participate
in the day-to-day or financial operations of the organization, and
does not have actual knowledge of the failure on which the penalty is
This exception does not apply if it results in no one being liable
for the penalty.
FICA and FUTA tax exceptions.
Payments for services performed by a minister of a church in the
exercise of the ministry, or a member of a religious order performing
duties required by the order, are generally not subject to FICA or
FUTA tax exception.
Payments for services performed by an employee of a religious,
charitable, educational, or other organization described in section
501(c)(3) that are generally subject to FICA taxes if the payments are
$100 or more for the year, are not subject to FUTA taxes.
FICA tax exemption election.
Churches and qualified church-controlled organizations can elect
exemption from employer FICA taxes by filing Form 8274,
Certification by Churches and Qualified Church-Controlled
Organizations Electing Exemption from Employer Social Security and
To elect exemption, Form 8274 must be filed before the first date
on which a quarterly employment tax return would otherwise be due from
the electing organization. The organization may make the election only
if it is opposed for religious reasons to the payment of FICA taxes.
The election applies to payments for services of current and future
employees other than services performed in an unrelated trade or
Revoking the election.
The election can be revoked by the IRS if the organization fails to
file Form W-2, Wage and Tax Statement, for 2 years
and fails to furnish certain information upon request by the IRS. Such
revocation will apply retroactively to the beginning of the 2-year
For purposes of this election, the term church means a
church, a convention or association of churches, or an elementary or
secondary school that is controlled, operated, or principally
supported by a church or by a convention or association of churches.
The term qualified church-controlled organization means
any church-controlled section 501(c)(3) tax-exempt organization, other
than an organization that both:
- Offers goods, services, or facilities for sale, other than
on an incidental basis, to the general public at other than a nominal
charge that is substantially less than the cost of providing such
goods, services, or facilities, and
- Normally receives more than 25% of its support from the sum
of governmental sources and receipts from admissions, sales of
merchandise, performance of services, or furnishing of facilities, in
activities that are not unrelated trades or businesses.
Effect on employees.
If a church or qualified church-controlled organization has made an
election, payment for services performed for that church or
organization, other than in an unrelated trade or business, will not
be subject to FICA taxes. However, the employee, unless otherwise
exempt, will be subject to self-employment tax on the income. The tax
applies to income of $108.28 or more for the tax year from that church
or organization, and no deductions for trade or business expenses are
allowed against this self-employment income.
Schedule SE (Form 1040), Self-Employment Tax, should be
attached to the employee's income tax return.
Political Organization Income Tax Return
Generally, a political organization is treated as an organization
exempt from tax. Certain political organizations, however, must file
an annual income tax return, Form 1120-POL, for any
year it has any political organization taxable income in excess of the
$100 specific deduction allowed under section 527 of the Code. In
addition, for tax years beginning after June 30, 2000, a political
organization that has $25,000 or more in gross receipts for the tax
year is also required to file Form 1120-POL, even if it has no
For tax years beginning after June 30, 2000, a political
organization that has $25,000 or more in gross receipts for the tax
year must file Form 990 or 990-EZ (and Schedule B of the form).
See Forms 990 and 990-EZ, earlier.
A political organization is a party, committee, association, fund,
or other organization (whether or not incorporated) organized and
operated primarily for the purpose of directly or indirectly accepting
contributions or making expenditures, or both, for an exempt function.
An exempt function means influencing or attempting to influence the
selection, nomination, election, or appointment of any individual to
any federal, state, local public office or office in a political
organization, or the election of the Presidential or Vice Presidential
electors, whether or not such individual or electors are selected,
nominated, elected, or appointed. It also includes certain office
expenses of a holder of public office or an office in a political
Beginning July 1, 2000, certain political organizations are
required to notify the IRS that they are section 527 organizations.
These organizations must use Form 8871. Certain of the
notifying section 527 organizations must use Form 8872 to
file periodic reports with the IRS dealing with their contributions
and expenditures. For a discussion on these forms, see Reporting
Requirements for a Political Organization, later.
Political organization taxable income.
Political organization taxable income is the excess of:
- Gross income for the tax year (excluding exempt function
- Deductions directly connected with the earning of gross
To figure taxable income, allow for a $100 specific deduction,
but do not allow for the net operating loss deduction, the
dividends-received deduction, and other special deductions for
corporations. Newsletter funds cannot claim the specific deduction of
Exempt organization not a political organization.
An organization exempt under section 501(c) of the Code must file
Form 1120-POL, for any year in which it:
- Spends any amount for an exempt function, or
- Has net investment income,
whichever is less.
A section 501(c) organization can set up a separate segregated fund
that will be treated as an independent political organization. The
earnings and expenditures made by the separate fund will not be
attributed to the section 501(c) organization.
Section 501(c)(3) organizations are precluded from, and suffer loss
of exemption for, engaging in any political campaign on behalf of, or
in opposition to, any candidate for public office.
Form 1120-POL is due by the 15th day of the 3rd month after
the end of the tax year. Thus, for a calendar year taxpayer, Form
1120-POL is due on March 15 of the following year. If any due
date falls on a Saturday, Sunday, or legal holiday, the organization
may file the return on the next business day.
Form 1120-POL is not required of an exempt
organization that makes expenditures for political purposes if its
gross income does not exceed its directly connected deductions by more
than $100 for the tax year.
Failure to file.
A political organization that fails to file Form 1120-POL, or
fails to include the required information on the form, is subject to a
penalty of $20 per day for each day such failure continues. The
maximum penalty imposed on failures regarding any one return is the
lesser of $10,000 or 5% of the gross receipts of the organization for
the year. In the case of an organization having gross receipts
exceeding $1,000,000 for any year, the penalty is increased to $100
per day with a maximum penalty of $50,000.
For more information about filing Form 1120-POL, refer to the
instructions accompanying the form.
Failure to pay on time.
An organization that does not pay the tax when due generally may
have to pay a penalty of 1/2 of 1% of the unpaid tax for each month or
part of a month the tax is not paid, up to a maximum of 25% of the
unpaid tax. The penalty will not be imposed if the organization can
show that the failure to pay on time was due to reasonable cause.
Reporting Requirements for a Political Organization
Certain political organizations are required to notify the IRS that
the organization is to be treated as a section 527
political organization. The organization is also required to
periodically report certain contributions accepted and expenditures
made by the organization. To notify the IRS of section 527 treatment,
an organization must file Form 8871. To report contributions and
expenditures, certain notifying organizations must file Form 8872.
A political organization must file Form 8871 to notify the IRS
both electronically and in writing that it is to be treated
as a section 527 organization. However, an organization is not
required to file Form 8871 if:
- It reasonably expects its gross receipts to always be less
- It is a political committee required to report under the
Federal Election Campaign Act of 1971 (FECA)(2 U.S.C. 431(4),
- It is a section 501(c) organization that is treated as
having political organization taxable income under section 527(f)(1)
of the Code.
All other political organizations, including state and local
candidate committees, are required to file Form 8871.
An organization must provide on Form 8871:
- Its name and address (including any business address, if
different) and its electronic mailing address,
- Its purpose,
- The names and addresses of its officers, highly compensated
employees, contact person, custodian of records, and members of its
Board of Directors, and
- The name and address of, and relationship to, any related
entities (within the meaning of section 168(h)(4) of the Code).
Before filing Form 8871, the political organization must have its
own EIN even if it has no employees. To get an EIN, file Form SS-4
with the IRS. Form SS-4 can be obtained by downloading it from the IRS
Internet web site at www.irs.gov or by calling
Form 8871 must be filed within 24 hours of the date on
which the organization was established for an organization formed
after June 30, 2000. Form 8871 must have been filed by July 31, 2000,
for an organization already in existence on June 30, 2000.
If the due date falls on a Saturday, Sunday, or legal holiday, the
organization may file on the next business day.
How to file.
An organization must file Form 8871 electronically and in writing
- Electronically via the IRS Internet web site at
- On paper by sending a signed copy of the form to the
Internal Revenue Service, Ogden UT 84201. An organization can fill in
and print out Form 8871 from the IRS Internet web site.
Failure to file.
An organization that is required to file Form 8871, but fails to do
so on a timely basis, will not be treated as a section 527
organization for any period before the date Form 8871 is filed. Also,
the taxable income of the organization for that period will include
its exempt function income (including contributions received,
membership dues, and political fundraising receipts) minus any
deductions directly connected with the production of that income.
The tax is computed by multiplying the organization's taxable
income by the highest corporate tax rate.
For more information on Form 8871, see the form and its
instructions. For a discussion on the public inspection requirements
for the form, see Public Inspection of Exemption Applications,
Annual Returns, and Political Organization Reporting Forms,
Every section 527 political organization that accepts a
contribution or makes an expenditure after July 1, 2000, for an exempt
function during the calendar year, must file Form 8872 except:
- A political organization that is not required to file Form
8871 (discussed earlier),
- A state or local committee of a political party, or
- A political committee of a state or local candidate.
All other section 527 organizations, including other state and
local political action committees, are required to file Form 8872 even
if they file reports with state or local election agencies.
The Form 8872 reports must include the name, address, and (if an
individual) the occupation and employer of any person to whom
expenditures are made that aggregate $500 or more in a calendar year
and the amount of such expenditures. The reports must also include the
name, address, and (if an individual) the occupation and employer of
any person that contributes in the aggregate $200 or more in a
calendar year and the amount of that contribution.
An organization is not required to report contributions accepted or
expenditures made after July 1, 2000, if they were received or made
under a contract entered into before July 2, 2000.
The due dates for filing Form 8872 vary depending on whether the
form is due for a reporting period that occurs during a calendar year
in which a regularly scheduled election is held or any other calendar
year ( a non-election year). In election years, the forms must be
filed on a quarterly or monthly basis and in connection to election
dates. In non-election years, the forms must be filed on a semiannual
or monthly basis. A complete listing of these filing periods can be
found in the Form 8872 instructions.
How to file.
Complete and file Form 8872 in one of two ways:
- Electronically via the IRS Internet web site at
- By sending a signed copy of the form to the Internal Revenue
Service, Ogden, UT 84201.
The form must be signed by an official authorized by the
organization to sign Form 8872.
An organization that filed Form 8871 both electronically and in
writing will receive a letter from IRS with the user ID and password
needed to file Form 8872 electronically. If an organization does not
receive its user ID and password, it may request one by writing to the
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Penalty for failure to file.
A penalty will be imposed if the organization is required to file
Form 8872 and it:
- Fails to file the form by the due date, or
- Files the form but fails to report all of the information
required or reports incorrect information.
The penalty is 35% of the total amount of contributions and
expenditures to which a failure relates.
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