Section 45IAC3.1-1-68. Unrelated business income of exempt organizations

   Unrelated Business Income of Exempt Organizations. Under IC 6-3-2-3.1, exempt organizations are subject to adjusted gross income tax and supplemental net income tax on income derived from an unrelated trade or business as defined in Internal Revenue Code §513. This section does not apply to the United States and its agencies and instrumentalities, nor to the State of Indiana, a state agency as defined in IC 34-4-16.5-2 [IC 34-4 was repealed by P.L.1-1998, SECTION 221, effective July 1, 1998.], nor a political subdivision of the state as defined in IC 34-4-16.5-2 [IC 34-4 was repealed by P.L.1-1998, SECTION 221, effective July 1, 1998.], all of which are exempt from adjusted gross income tax on all income. This section does apply to all other exempt organizations such as churches, fraternal organizations and professional societies.

  An "unrelated trade or business" is one the conduct of which is not substantially related (aside from the needs of income or the use of the profits) to the performance by the exempt organization of the function constituting the basis for which it was granted exemption. However, under Internal Revenue Code § 513 the term does not include income from a trade or business:

  (1) in which substantially all the work is done for the organization without compensation; or

  (2) which is carried on primarily for the convenience of its members, employees, etc.; or

  (3) which is the selling of merchandise substantially all of which has been received by the organization as gifts or contributions.

  The exempt organization will compute its taxable unrelated business income in the same manner as any other taxpayer having business income. However, its business deductions are limited to those directly connected with the carrying on of the unrelated trade or business. Taxpayers should consult the Internal Revenue Code §§511-515 and the regulations established thereunder for a more detailed explanation of the Federal income tax on unrelated business income. (Department of State Revenue; Reg 6-3-2-3.1(010); filed Oct 15, 1979, 11:15 am: 2 IR 1534; errata, 2 IR 1743)