Unrelated Business Taxable Income (UBTI)

Summary

This practice note discusses unrelated business taxable income (UBTI), addressing the two types of UBTI, its impact on investors, and practical ways to minimize its effect on a U.S. tax-exempt organization. An important consideration for U.S. tax-exempt organizations that make portfolio investments into private equity investment funds (PE funds) is to ensure that such funds are structured as tax efficiently as possible. In general, organizations that are exempt from federal income tax nonetheless are subject to tax on their UBTI. UBTI can arise directly from an exempt organization's activities, or indirectly as a result of its investment in a private fund (substantially all of which are treated as pass-thrus for U.S. tax purposes). UBTI is not illegal, immoral, or fattening, but it can significantly impact an exempt organization's return on its investment and, therefore, any negative effects must be minimized to the greatest extent possible.