ExpertMedium1 markMultiple Choice
CPA · Question 22 · Area II: Entity Tax Compliance
A tax-exempt organization (501(c)(3)) operates a gift shop. The shop sells items related to its exempt purpose (books, educational toys) and items unrelated (souvenirs, clothing). The unrelated sales generate $50,000 gross income. Direct expenses for unrelated sales are $30,000. The organization also has $5,000 of dividend income from investments. The specific deduction is $1,000. What is the Unrelated Business Taxable Income (UBTI)?
A tax-exempt organization (501(c)(3)) operates a gift shop. The shop sells items related to its exempt purpose (books, educational toys) and items unrelated (souvenirs, clothing). The unrelated sales generate $50,000 gross income. Direct expenses for unrelated sales are $30,000. The organization also has $5,000 of dividend income from investments. The specific deduction is $1,000. What is the Unrelated Business Taxable Income (UBTI)?
Answer options:
A.
$25,000
B.
$19,000
C.
$20,000
D.
$24,000
How to approach this question
UBTI = Gross Unrelated Income - Directly Connected Expenses - Specific Deduction ($1,000). Exclude passive investment income (dividends, interest) unless debt-financed.
Full Answer
B.$19,000✓ Correct
B
IRC §512. Gross UBI ($50,000) - Expenses ($30,000) = $20,000. Less Specific Deduction ($1,000) = $19,000. Dividends are excluded from UBTI under §512(b)(1).
Common mistakes
Including passive income; forgetting the $1,000 deduction.
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