Expansion on Part VII (Analysis of
Income-Producing Activities)
Part VII (Analysis of Income-Producing
Activities) found on page 6 of the Form 990
provides some more detailed information about the
revenue information reported at the Revenue
section of Part I on page 1. Part VII is
designed primarily to elicit information about a
filer’s unrelated business income. It
also contains some useful information about fee
income received from the government (like income
from a government contract). This Expansion
explains Part VII.
Revenue reported on the Form 990 may be
considered as being divided into two general
categories: contributions (Line 1) and revenue
from income-producing activities (Lines 2 through
11). Income-producing revenue may in turn
be divided into income received from activities
related to the filer’s exempt purposes and
income derived from activities unrelated to the
filer’s exempt purposes (unrelated business
activities). Some nonprofit organizations
engage in unrelated business activities, that is,
activities that have nothing to do with achieving
the organization’s exempt purpose and are
conducted for the most part merely to raise funds
to support the organization’s exempt
activities. An example would be a nonprofit
that published a journal that ran advertising for
products having nothing to do with the
nonprofit’s exempt purpose. An
organization with unrelated business income must
file a Form 990-T and may have to pay an
unrelated business income tax on such income if
it has unrelated gross income in excess of
$1,000.
Part VII of the Form 990 elicits information
that analyzes the income reported at Lines 2
through 11 on Part I to show whether it is
derived from an exempt or unrelated
activity. A reader of the Form 990 may
conclude that income from an unrelated business
activity may be a reliable source of future
income, especially if the activity has been
carried on for some time. If the filer
reports significant amounts of unrelated business
income, it is, of course likely that it engages
in a significant amount of unrelated business
activities and this may be relevant to a
reader’s assessment of a filer. Here
is Part VII (as used in example 3 from the text):
As noted, unrelated business income is
included in the income reported at Lines 2
through 11 on Part I. There is no way of
telling, however, how much, if any, of such
income is unrelated business income. To
find this out the reader must turn to Part
VII. Part VII lists 11 lines that parallel
Lines 2 -11 on Part I. Thus, Line 93 on
Part VII is the same as Line 2 on Part I, Line 94
on Part VII is the same as Line 3 on Part I,
etc. To the right of each line are five
columns ((A) -(E)). To show what part of
its income producing revenue derives from
carrying out its exempt function and how much
derives from unrelated business, the filer
allocates the amount of such income reported on
each line among these five columns. The
first four columns (columns (A) through (D))
elicit information about unrelated business
income. The fifth (column (E)) asks for the
amount of income derived from carrying out the
filer’s exempt function.
Most nonprofits do not generate unrelated
business income so that the only revenue they
will report at Part VII will be from program
activities that form the basis of their
exemptions. If, for example, the filer were
a school that received tuition income, it would
briefly describe the particular program for which
it received tuition income at one of the Line 93
sub-lines and report the amount of the income at
column (E)
As noted, some nonprofits also conduct
unrelated trades or businesses. A school,
for example, as well as offering an educational
program, might also operate a restaurant for its
students and faculty and publish a journal in
which it runs unrelated advertising. The
latter two activities would constitute businesses
which may be unrelated. The school would be
required to list these two program activities on
two of the lines offered by Line 93. It
would then have to report the information
required by columns (A) and (B) and in some cases
by columns (C) and (D).
Column (A) asks for the business code of the unrelated business.
These codes are not found in the Instructions to the Form 990 but
rather in the Instructions to the Form 990-T. On the last
page of the Instructions for Form 990-T there are listed, under
the title "Codes for Unrelated Business Activity," over
200 codes covering various activities (e.g., code 522130 is for
credit unions and code 445100 is for grocery stores). In our
example of a school restaurant, the school would list code 722210
(Limited-service eating places) for its restaurant and code 541800
(Advertising and related services) for the advertising activity
of its journal.
Column (B) asks for the amount of income
received from the unrelated business. Here
the school in our example would enter the amount
of gross income it received from selling
advertising in its journal. (In a moment we
will explain why the income from the restaurant
would not be reported at column (B).)
Column (C) asks for the exclusion code for certain kinds of income
and column (D) asks for the amount of income to which the exclusion
code applies. This requires a brief explanation. Income
from certain kinds of business activities is excluded from taxation.
For example, if the activity is not "regularly carried on,"
its income is excluded from the unrelated business tax under and
section 512(a)(1) of the Code. The Instructions provide a
sheet that lists all the various exclusions from the unrelated business
income tax and assigns a code to them. If the filer has received
income from a business that is excluded from the unrelated business
income tax, it would list the exclusion code in column (C) and the
amount of such income in column (D). Returning to our example
of the school’s restaurant, since all or most of this income
will not be taxable because of a special exclusion, the filer would
enter the exclusion code in column (C), which in this case would
be "03." (If the restaurant were also used to sell
meals to patrons that were unconnected to the school, the income
from that activity would be subject to the unrelated business income
tax.)
As noted, program service revenue received
from the government will also be reported on Part
VII. Line 93f elicits information about
Medicare or Medicaid payments and Line 93g
elicits information about revenues from
government contracts. In a very large
number of cases, revenue from government
contracts will be reported in column (E) as
"exempt function income." In rare
cases, however, a nonprofit may perform services
for the government that are not related to its
exempt purposes and the income from these
activities would be unrelated business
income. In understanding the nature of an
organization, it may be considered significant
that it receives nearly all of its revenue from a
contract (or contracts) with a government agency
(or agencies).
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