UBIT for nonprofit selling custom bracelets as fundraiser - tax implications?

Thanks for this explanation! Quick follow-up: what if we decide to do this bracelet fundraiser every year for our annual event? Would that then count as "regular" activity and potentially trigger UBIT? Also, do you know if there's a specific form we need to file if we DO end up having to pay UBIT?

If you do this annually, it could potentially be considered "regular" activity, but that alone doesn't automatically trigger UBIT. The key question remains whether selling bracelets is substantially related to your exempt purpose. If the bracelets clearly promote your mission or educational message, you can make a stronger case that they're related to your exempt purpose. If you do end up having UBIT liability, you'd need to file Form 990-T (Exempt Organization Business Income Tax Return) if your gross income from unrelated business activities is $1,000 or more. You'd report the income and expenses related to just the unrelated business activity on this form.

How exactly does taxr.ai work? I'm curious because our animal rescue foundation does t-shirt fundraisers twice a year and our accountant always says we're fine, but now I'm second-guessing. Does it just give general advice or actual binding tax guidance?

I'm skeptical about these AI tax tools. Have you verified the information with an actual nonprofit tax attorney? The last thing you want is an IRS audit because some algorithm missed a nuance about your specific situation.

The tool analyzes your specific documents and flags relevant tax issues based on your situation. It's not just general advice - it pinpoints the exact sections of your financials and activities that might raise concerns. For your t-shirt fundraisers, it would analyze your specific sales patterns, connection to your mission, and other relevant factors. I definitely used it as a starting point rather than the final word. What I appreciated was that it gave me specific IRS regulations and case references that I could discuss with our accountant. It basically helped me ask better questions and understand the reasoning behind our tax decisions rather than just taking someone's word for it.

Wait, how does this actually work? They somehow get you to the front of the IRS phone queue? That seems impossible given how notoriously difficult it is to reach anyone there.

This sounds like a scam. There's no way to "skip the line" with federal agencies. They probably just keep calling and transferring the call to you once they get through, charging you a premium for something you could do yourself with enough persistence.

It's not about skipping any lines. They use an automated system that continually redials and navigates the IRS phone tree until they reach a human representative. Then they connect you to that person. It's basically doing the tedious waiting part for you. Yes, theoretically anyone could do this themselves with enough time and patience, but after spending 3+ hours on multiple days getting disconnected or told to call back later, having someone else handle that part was completely worth it. The IRS agent I spoke with was super helpful and gave me specific guidance on our UBIT situation that I couldn't find clearly explained anywhere online.

Thanks for this insight! Yes, our bracelets have our organization's name and this year's event theme which is directly tied to our mission of supporting literacy in underserved communities. The bracelet says "Read Together 2025" which is our campaign slogan. We're expecting to make roughly $4,500 from the sales (charging $15 for bracelets that cost us $5 to make). Would an amount like that even be worth the IRS's attention? I've heard there might be some minimum threshold before they care.

That messaging connection to your literacy mission definitely strengthens your position that this is substantially related to your exempt purpose. The bracelets are promoting your specific campaign and mission, not just generic merchandise. Regarding the amount, there is a reporting threshold - you only need to file Form 990-T if your gross unrelated business income is $1,000 or more. However, that's a moot point if the activity qualifies as related to your exempt purpose, which yours seems to. The $4,500 profit margin isn't large enough to likely trigger special scrutiny, but it's always the nature of the activity rather than the amount that determines if UBIT applies.

Is there a specific percentage of total income that nonprofits should stay under to avoid UBIT becoming an issue? Like if this bracelet fundraiser is less than 10% of their total annual revenue, does that make it less likely for the IRS to care?

There isn't really a specific percentage threshold that creates a "safe harbor" from UBIT. The IRS evaluates each unrelated business activity on its own merits regardless of what percentage of total revenue it represents. However, you're right that smaller amounts tend to get less scrutiny in practice. The key factors are still: 1) Is it regularly carried on? 2) Is it substantially related to your exempt purpose? 3) Does it meet any specific exceptions? What matters more than the percentage is documenting why the activity IS related to your exempt purpose. In Mason's case with literacy-focused bracelets saying "Read Together 2025," that's a much stronger position than if they were selling generic merchandise that happened to raise money for literacy programs. The fragmentation rule Lorenzo mentioned is important though - even small unrelated activities can technically trigger UBIT if they don't qualify for an exception, regardless of your organization's overall mission focus.