UNRELATED BUSINESS INCOME TAX (UBIT)

We are living in a society that encourages free, open, and fair competition. If you find your competitor with some type of privilege, you will likely be discouraged or at least disappointed.

Let’s say, you own a sandwich shop at a busy downtown strip mall near a tourist attraction. The shop next door is owned and operated by a nonprofit entity called as EDL which stands for “Everyone Deserves Lunch.’ The shop's mission is to give out free sandwiches to low income household children and homeless people. After 2 p.m. every day, they sell their left-over sandwiches to office workers, shoppers, or tourists at a small margin, since they see it as their service to the community. Their unusually cheap price was possible  as  the EDL doesn’t pay property tax, franchise tax or income tax. They also don’t pay any salary to their workers, as they are all volunteers. People like the idea of helping out a nonprofit entity in good will. Furthermore, they like their cheap lunch.

It sounds like a great thing going on for everyone else in this town except for you, the sandwich shop owner. Since you are faithfully paying property tax, income tax, sales tax, and salary to your staff, your sandwich is about 40% more expensive than the one sold by your local nonprofit competitor. It’s just matter of time. You will lose all your business, and may have to wait in line yourself for a free sandwich at the EDL.

Is the EDL really doing a good job nurturing the community or is the EDL driving the small business out of business?

Fortunately, this is not a real story. My next article will address the ways in which the Internal Revenue Service alleviates this potentially unfair competition issue.