Your annual golf tournament raised $85,000 last year, and your charity auction brought in $120,000. Both events felt like tremendous successes until someone mentioned that a portion of those proceeds might be subject to federal taxes. Wait, what? You’re tax-exempt, right?
Here’s the reality: your exempt status doesn’t automatically protect all revenue. Unrelated Business Income Tax (UBIT) can apply to certain fundraising activities, and the consequences go beyond an unexpected tax bill. We’re talking about potential penalties, increased IRS scrutiny, and threats to your exempt status.
The key is understanding which fundraising activities trigger UBIT and how to structure your events to minimize risk.
Why the IRS Cares About Your Fundraising Events
The IRS created UBIT rules to level the playing field between tax-exempt organizations and for-profit businesses. When your fundraising activities operate like commercial enterprises, the IRS wants to ensure you’re not gaining an unfair competitive advantage.
Every fundraising activity gets evaluated under three criteria:
- trade or business
- regularly carried on
- not substantially related to your exempt purpose.
The “regularly carried on” factor trips up many organizations. Your annual golf tournament probably passes this test, but monthly poker nights are a different conversation.
For broader UBIT fundamentals, our comprehensive guide covers the basics. Let’s focus on fundraising specifics.
Bingo: Your Best Friend in Fundraising
Among all fundraising activities, bingo has the strongest protection. Section 513(f) specifically excludes bingo income from UBIT when you meet three requirements: wagers, winner determination, and prize distribution happen in front of all participants; bingo isn’t normally run commercially in your area; and you follow all state and local laws.
This exception works regardless of how often you run bingo, which makes it incredibly valuable for organizations needing regular fundraising income. The catch? This protection only covers traditional bingo. Instant bingo, pull tabs, and electronic games don’t qualify and get the regular UBIT treatment.
Raffles and Games of Chance: Volunteer Labor Saves the Day
Raffles and lotteries don’t get the special protection that bingo enjoys, so they typically generate unrelated business income. However, the volunteer labor exception frequently comes to the rescue.
Section 513(a)(1) says income from activities where “substantially all” work is performed by unpaid volunteers escapes UBIT. While “substantially all” is not exclusively spelled out in the regulations, the IRS guidance and case law suggests that 85 percent or more volunteer involvement meets this standard, but you need documentation. Track volunteer hours meticulously and structure events to maximize volunteer involvement while ensuring professional execution where it matters.
Auctions: Donated Items Make the Difference
Auction income generally avoids UBIT when substantially all items were donated to your organization. This makes sense because selling donated goods doesn’t create the same competitive issues as running a retail operation with purchased inventory.
The key phrase here is “substantially all.” Organizations that receive 80 to 85 percent of their auction items through donation typically meet this threshold. Items you purchase for resale, consignment arrangements, or services donated by vendors looking for exposure might not qualify for protection.
Golf Tournaments: Popular but Complex
Golf tournaments are among the most popular fundraising activities, but they’re also the most complex from a UBIT perspective. These events often combine multiple revenue streams that might get different tax treatment.
Green fees, cart rentals, and meal charges might qualify as exempt fundraising, while pro shop sales and alcohol service could trigger UBIT. Volunteer involvement becomes crucial. Organizations using volunteers for registration, scoring, and hospitality while hiring professionals only for course operations often avoid UBIT issues. Volunteer involvement becomes crucial.
Corporate sponsorship arrangements need particular attention. Payments for genuine sponsorship recognition generally escape UBIT, while arrangements that provide advertising benefits to sponsors create taxable income. The distinction often comes down to exactly what sponsors receive and how you acknowledge their support.
Protecting Your Organization
Effective UBIT management requires documentation that would satisfy an IRS examination. This means detailed volunteer hour tracking, separate accounting for fundraising activities, and clear explanations of how activities relate to your exempt purpose. Board resolutions approving major fundraising activities should explicitly consider UBIT implications.
UBIT violations carry consequences beyond the immediate tax bill. You’re required to file Form 990-T when gross unrelated business income exceeds $1,000, creating ongoing compliance obligations. More concerning is the potential impact on your exempt status. While isolated UBIT violations rarely threaten exemption, patterns of unrelated activity can raise questions about your organization’s primary purpose.
Special rules apply to certain organization types. Social clubs under Section 501(c)(7) face stricter requirements: all income from nonmembers, including gaming proceeds, is subject to UBIT, and excessive nonmember income can jeopardize exempt status entirely. Veterans’ organizations enjoy more flexibility: income from members and bona fide guests typically avoids UBIT, but income from the general public remains taxable.
At Rea, our experienced not-for-profit advisory team works with organizations to develop fundraising approaches that balance revenue generation with tax compliance. We understand that your mission depends on sustainable funding, and our job is making sure your fundraising activities support rather than threaten your long-term success.
Don’t let UBIT uncertainty limit your fundraising potential or expose your organization to unnecessary risk. Contact our not-for-profit specialists today to review your current activities and develop a proactive approach that maximizes your fundraising success while maintaining full compliance.
