Question 1

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)?

Accepted Answer

UBTI = Gross Unrelated Income - Directly Connected Expenses - Specific Deduction ($1,000). Exclude passive investment income (dividends, interest) unless debt-financed.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Including passive income; forgetting the $1,000 deduction.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 5

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