Unrelated Business Income Tax (UBIT) is a tax on unrelated business income generated by a tax exempt organization from activities other than those that are the basis of such fiscal exemption. For instance, unrelated business income from a snacks parlor run by a tax exempt university for students and others alike is subject to UBIT although its regular earning from tuition fees continues to be tax exempt.
Exempt purpose for a tax exempt organization includes education, research, charity, philanthropy or other purpose that is the basis of such exemption. Any activity, not related to such purpose, is unrelated.
Even a tax exempt organization is taxed on its unrelated business taxable income, regardless of whether the proceeds of the same are used to fund the main or exempt activities.
There are two types of unrelated business taxable income. These are income from regular but unrelated business and income from debt financed properties in the form of rent, interest or royalties.
An unrelated business by a college or university for the convenience of its faculty, staff and students is not liable to tax on its income. Revenue of such exempt institution from research, not sponsored by a profit sharing collaborator, is also not chargeable to UBIT. Similarly donation or contribution received by such tax exempt institution is also exempt from income tax. Revenue of such institution from an activity substantially performed by volunteers is also outside the UBIT net.
An exempt organization that has more than $1,000 as gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if its tax for the year is likely to touch $500 or more. 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.
(More:http://www.irs.gov/charities/article/0,,id=96104,00.html
http://www.irs.gov/charities/charitable/article/0,,id=123293,00.html
http://vpf-web.harvard.edu/ofs/tax_services/uni_unr.shtml)
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