(1) Exempt organizations are required to include in unrelated business taxable
income “the gross income derived by any organization from any unrelated trade
or business (as defined in Section 513) regularly carried on by it less
deductions allowed that are directly connected with the carrying on of such
trade or business, in both cases computed with the modifications provided in
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Section 512(b).” The following three conditions generally must be met per
Section 513 and Treas. Reg. 1.513-1(a) before income from an activity may be
classified as unrelated trade or business income:
a. The income is from a trade or business,
b. The trade or business is regularly carried on by the organization, and
c. The conduct of such trade or business isn’t substantially related (other
than through the production of funds) to the organization’s performance of
its exempt functions.
(2) Section 512 includes certain modifications to this general definition. See Part VI
of this document.
