What must an activity be to qualify as unrelated business income (UBI)?

To qualify as unrelated business income (UBI), an activity must be recognized as a trade or business. UBI refers to income generated from activities that are regularly carried on and not substantially related to an organization’s exempt purpose. This means that the activity must involve selling goods or services in a manner similar to a for-profit business. The crucial aspect is that the income is derived from activities that are not directly tied to the charitable, educational, or other exempt activities for which the organization was granted its tax-exempt status.

While charitable activities, passive investments, and public services may be part of an organization's broader mission, they do not inherently constitute trades or businesses for the purposes of UBI. Charitable activities are generally more aligned with the organization’s exempt status and do not generate UBI if they are directly related to that mission. Passive investments, such as stocks or bonds, typically do not involve active engagement and are therefore not classified as a trade or business. Similarly, public services provided by an organization may support its exempt purpose, but if they are not conducted in a manner resembling a business operation, they do not qualify as UBI. Therefore, the key criterion for UBI is that the activity must be a trade or business that is regularly conducted