Page 117 - Washington Nonprofit Handbook 2018 Edition

the operation of a restaurant used exclusively as a job-training program for
indigent persons may be charitable.

c. Exceptions for Certain Activities

Certain activities are excluded from the definition of an unrelated trade or
business, and income from these activities accordingly is not UBI.

(i) Volunteer Exception

A business where substantially all of the work is performed by
uncompensated volunteers does not generate UBI. For example, operation of a
retail store where all of the work is performed by unpaid volunteers is not an
unrelated trade or business, and any income generated is not UBI.

(ii) Convenience Exception

A business carried on primarily for the convenience of an exempt
organization’s members, students, patients, officers or employees is not an
unrelated trade or business and does not generate UBI. For example, a hospital

cafeteria for employees, patients and visitors does not generate UBI.

(iii) Donated Merchandise

Selling merchandise, substantially all of which has been donated to the
organization, is not an unrelated trade or business, and does not generate UBI. For
example, a retail thrift store in which all merchandise sold is donated to the
organization does not generate UBI.

(iv) Exclusions for Investment Income

The following categories are excluded from UBI, and therefore generally are
not taxable, on the grounds that they are passive income from investment assets:

y Dividends, royalties, interest and annuities;

y Rents from real property are excluded, subject to a variety of
exceptions, (although income from debt-financed property, discussed
below, may be UBI); or

y Gains from the sale or exchange of property are generally excluded.
For example, a 501(c)(3) organization generally is not subject to tax on
gain on its sale of stock. If the organization regularly sells items that

WASHINGTON NONPROFIT HANDBOOK -106- 2018