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Focus on Not-For-Profits: Arts Organizations – Identifying Potential Unrelated Trades or Businesses

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Given the wide variety of activities conducted by arts organizations, it becomes increasingly difficult to distinguish which activities fall under the IRS’s definition of an unrelated trade or business.
March 8, 2010

Given the wide variety of activities conducted by arts organizations, it becomes increasingly difficult to distinguish which activities fall under the IRS’s definition of an unrelated trade or business. Although each determination is unique and subjective, here are some general questions to ask about your organization’s activities to identify potential unrelated trades or businesses and ensure that all of the necessary tax forms have been filed. In summary, the IRS defines an activity as an unrelated trade or business if all three of the following conditions exist:

  1. The organization is conducting a trade or business for the production of income from selling goods or performing services,
  2. The trade or business is regularly carried on, and
  3. The activity is not substantially related to the carrying out of the organization’s exempt purpose.

To make this assessment, consider the following questions:

Does the organization generate revenue from a trade or business activity?

Some common examples of such revenue for arts organizations would be if the organization…

  • Charges for use of its parking lot by individuals who are not patrons?
  • Sells advertising in its publications, newsletter, or program?
  • Operates a gift shop, bookstore, or restaurant?
  • Licenses use of its name, logo, or mailing list?
  • Rents property to others?

Just because your organization participates in any of the above activities does not necessarily mean that the activity is an unrelated trade or business. To evaluate, consider whether there is an intent to make a profit from this activity – the key being intent, not necessarily whether the activity has historically been profitable. Although this determination is subjective, the absence of such intent could indicate the activity is not a trade or business.

In addition, evaluate whether the activity is incidental to your organization’s exempt activities. The IRS specifies that a de minimis activity is not considered a trade or business – such activities would generally be those that generate gross revenue less than $1,000.

After consideration of these exceptions, if the answer to the above question is yes, you’ve fulfilled the first of the three criteria noted above. Answer the next question to see if you meet the second criterion.

Is the activity regularly carried on?

Business activities ordinarily are regularly carried on if they have frequency and continuity, and are pursued in a manner comparable to similar commercial activities.

Participating in an activity for a few weeks a year may not be considered to be regularly carried on while participating in an activity one day a week might be. Even seasonal activities might be considered to be regularly carried on if the activity is the kind normally undertaken by commercial organizations during the same seasonal period. The key is to evaluate whether your period of operations for the activity is comparable to that of similar for-profit entities.

If so, then you’ve fulfilled the second criterion as well. Answer the next question to see if you meet the third criterion and thus have an unrelated trade or business.

Are any of the regularly carried on revenue-producing activities unrelated to the exempt purpose of the organization?

To be substantially related to your exempt purpose, an activity must contribute importantly to the accomplishment of that purpose. An activity cannot qualify as substantially related solely because its income is needed or used to fund the conduct of an exempt function.

There are certain activities that have been excluded from the definition of unrelated business income. These activities include:

  • activities that are substantially (i.e., 85% or more) performed by volunteers,
  • sale of donated merchandise,
  • sale of merchandise generated in fulfilling the exempt purpose (e.g., an art school’s sales of student artwork),
  • interest, dividends or rental income received by a Section 501(c)(3) organization unless the assets generating the income are debt-financed, and
  • activities that are carried out for the convenience of members, students, patrons, employees, etc.

In making this determination, let’s review some examples of typical activities carried out by arts organizations to see if they are generally considered to be unrelated activities:

  • Food Service – This is generally considered to be an unrelated activity unless the meals are provided for the convenience of members, patrons, visitors, etc. Depending on the location of your food service and who has access to it, infrequent sales to the general public are also generally considered to be exempt. However, if the dining facilities are advertised and available to the general public and are operated in a commercial fashion (with competitive prices, professional management, etc.), the income from the sales to the general public is considered unrelated business income.
  • Gift Shops – The distinction between exempt and unrelated activities lies in the type of merchandise sold. While the sale of educational books at a museum or CDs from a theatrical performance might contribute to the organization’s exempt purpose, the sale of candy and sundries might not. A separate analysis for each type of merchandise should be performed to determine whether its sale substantially contributes to the seller’s exempt purpose. In addition, if the gift shop is staffed primarily with volunteer labor (85%), the sales are not considered unrelated business income.
  • Facility Rental – If your property is not debt-financed, rental of it is not considered an unrelated trade or business. However, if the property rented out is debt-financed, an analysis to determine if substantially all of the property’s use is directly related to the exercise or performance of the organization’s exempt purpose is required. The IRS defines substantially all as 85% or more of the use of the property. To determine if this 85% ratio is met, compare the total time the property is rented for non-exempt purposes (e.g., the total number of hours/days the property is rented relative to the total number of hours/days the organization operates) or compare the portion of the property used for non-exempt purposes (e.g., the square footage of the rented space to the total square footage). If the 85% ratio cannot be met, this rental activity is considered an unrelated business.
  • Parking Lot Rental – The IRS generally considers this to be a service provided, rather than a rental. As such, this activity is generally only an exempt activity if it is not regularly carried on (e.g., the parking facility is only open sporadically throughout the year, and there are no advertising or other efforts to promote parking by the public) or if the primary purpose is to provide a convenience to the organization’s patrons. Analysis of how frequently the parking lot is available to the public and who is utilizing this service is needed to determine if this activity is an unrelated business.
  • Advertising in Newsletters, Programs, Etc. – This is perhaps the most difficult assessment to make as a determination of the duration of the advertising activity is required. When the advertising is not related to a particular fundraising event, a review to determine if the advertising is intermittent is needed – the key is the duration of the selling of the advertising, not whether the event to which the advertising is tied is regularly carried on. The distinction between advertising and sponsorships also needs to be considered in making the determination of whether the activity is subject to the unrelated business income rules.

If based on your responses above, you believe your organization has an unrelated trade or business, the filing of IRS Form 990-T is required. Please contact RubinBrown if we can be of assistance in the evaluation of whether you have an unrelated trade or business and/or filing a Form 990-T.


Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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