The legal rules regarding UBIT are relatively important as the trend for “social enterprise” becomes more and more prevalent in both nonprofits and for profits. Due to the shrinking of governmental budgets, local, state and federal, funds are being depleted .There are approximately 1,000,000 charities in the US, thus, many charities fighting over depleted funds means one thing, sustainability and “doing good” must entice enterprises that “generate revenue” through their programs, whether they are operating in the “nonprofit” or for profit business model. Remember, a charity is NOT required to feed homeless, or, to prevent abuse to the elderly or, to provide relief to the distressed, one can form a for profit enterprise, like a corporation to operate a homeless shelter, However, charities are ideal vehicles for these types of activities because contributions are tax deductible to the donor and the income is exempt from taxation. However, the minute a charity generates revenue “unrelated” to its exempt purpose and that revenue is “regular and continuous” and from a “trade or business”, the revenue is taxable subject to Section 512 and 513 of the Internal Revenue Code.
You might say but wait a second Kent, why does it matter if it meets this three prong test, the money generated is going to be going to charitable activities. The answer is the Government does not believe that it is fair to businesses who are in the same or similar businesses to have to compete with charities and are subject to taxes, thus, charities operating non-charitable business activities must be taxed like businesses even if the monies will benefit charitable causes.