California Updates UBTI Conformity for Exempt Organizations: What Nonprofits Should Review Now
California’s Franchise Tax Board recently highlighted an important conformity update for tax-exempt organizations. In its June 2026 Tax News, FTB explained that Senate Bill 711 updated California’s conformity to Internal Revenue Code section 512 as of January 1, 2025, subject to California-specific modifications.
For California nonprofits and other exempt organizations, this matters because California is now aligning more closely with the federal rules requiring separate reporting of unrelated business taxable income, commonly referred to as UBTI, for each unrelated trade or business under IRC section 512(a)(6).
This is not merely a form change. It may require exempt organizations to revisit how they identify unrelated business activities, track revenue and expenses, allocate shared costs, preserve net operating loss information, and prepare for future California reporting requirements.
What Is UBTI?
Tax-exempt status does not mean that every dollar received by an exempt organization is exempt from tax. In general, unrelated business taxable income is income from a trade or business that is regularly carried on and not substantially related to the organization’s exempt purpose.
For example, a nonprofit may operate primarily for charitable, educational, religious, healthcare, or other exempt purposes, but it may also earn income from advertising, facility rentals, parking, licensing, merchandise sales, consulting, laboratory services, event activity, investment partnerships, or other business-like operations. Some of those activities may be excluded from UBTI, some may be substantially related to the organization’s exempt function, and some may be taxable unrelated business activity.
The analysis is fact-specific. The label placed on the activity is less important than how the activity operates, how frequently it is conducted, who benefits from it, and whether it meaningfully furthers the organization’s exempt purpose.
What Changed Under SB 711?
SB 711 updated California’s general conformity date to the Internal Revenue Code from January 1, 2015, to January 1, 2025, for many personal income tax and corporate tax purposes. As part of that conformity update, FTB has now explained that California conforms to IRC section 512 as of January 1, 2025, except where California law specifically modifies that conformity.
The practical result is that exempt organizations must follow the federal rule requiring separate reporting of UBTI for each unrelated trade or business under IRC section 512(a)(6).
This separate activity reporting requirement is sometimes called “siloing.” Instead of aggregating all unrelated business income and losses together, an exempt organization with more than one unrelated trade or business generally must compute UBTI separately for each activity. Losses from one unrelated business activity may not automatically offset income from another unrelated business activity.
That distinction can materially affect tax liability, financial reporting, return preparation, and audit risk.
Why This Matters for California Nonprofits
California nonprofits often focus on federal exemption compliance because the IRS exemption determination is usually the most visible issue. But California tax-exempt status and California filing obligations require separate attention.
FTB’s June 2026 guidance states that exempt organizations should begin identifying and separately tracking each unrelated trade or business in preparation for reporting on the 2026 tax return. FTB also states that details regarding implementation, including the applicable reporting method and form, are still under development.
That means organizations have advance notice, but not necessarily complete mechanical instructions. Waiting until the return is due may create problems. If an organization has not tracked activities separately during the year, it may be difficult to reconstruct revenue, deductions, employee time, overhead allocations, depreciation, cost sharing, partnership income, and activity-specific losses after the fact.
For organizations with multiple revenue streams, the burden may be significant.
Common Activities That Should Be Reviewed
California exempt organizations should consider whether they have more than one unrelated trade or business. This review may be particularly important for hospitals, universities, private schools, museums, social clubs, trade associations, private foundations, religious organizations, public charities, supporting organizations, and tax-exempt affiliates of larger business groups.
Activities that may require review include advertising income, sponsorship arrangements, facility rentals, event income, parking operations, online sales, merchandise sales, licensing arrangements, affinity programs, laboratory or testing services, management services, consulting, catering, debt-financed property, and income reported from partnerships or alternative investments.
Not all of these activities are necessarily taxable. Some may be excluded from UBTI, some may be substantially related to the exempt purpose, and some may be protected by specific statutory exceptions. But the organization should not assume that all revenue is exempt simply because the entity itself is tax-exempt.
The Recordkeeping Issue
The most immediate action item is recordkeeping. If California requires separate activity-level reporting for the 2026 tax return, exempt organizations should be able to identify each unrelated trade or business and track income and deductions by activity.
This may require changes to accounting systems, chart-of-account classifications, internal reporting, cost allocation policies, and documentation of how expenses are assigned among exempt and unrelated activities.
The organization should also review how it identifies activities for federal Form 990-T purposes. If federal and California reporting positions differ, the organization should understand why and preserve support for those differences.
In a later audit, FTB may ask how the organization classified an activity, why it treated the activity as related or unrelated, how it allocated expenses, and whether the organization improperly used losses from one activity to reduce income from another. Those questions are easier to answer when the organization has contemporaneous records rather than reconstructed explanations.
Potential Controversy Issues
This conformity update may create several California tax controversy issues.
First, FTB may challenge whether an activity is related to the organization’s exempt purpose or is instead an unrelated trade or business. This may require factual development, including governing documents, program descriptions, contracts, invoices, promotional materials, board minutes, staffing records, and evidence showing how the activity furthers the exempt mission.
Second, FTB may examine whether the organization properly separated multiple unrelated business activities. An organization may view several activities as one integrated business, while FTB may argue that they are separate trades or businesses requiring separate computations.
Third, expense allocation may become a dispute area. Shared expenses such as salaries, rent, technology, insurance, depreciation, marketing, and administrative overhead may need to be allocated between exempt and unrelated activities, or among multiple unrelated business activities.
Fourth, net operating losses may become more complicated. Under the federal siloing approach, losses are generally tracked by separate unrelated trade or business. Organizations with historical losses or multiple activities should review how those losses are maintained and applied.
Finally, California-specific modifications may still matter. SB 711 moved California closer to federal law, but conformity does not always mean complete identity between federal and California tax treatment.
Practical Steps for Exempt Organizations
California exempt organizations should begin by identifying all revenue-generating activities and determining whether each activity is substantially related to the organization’s exempt purpose, excluded from UBTI, or potentially unrelated business activity.
Organizations should then evaluate whether they have more than one unrelated trade or business and whether their accounting system can separately track each activity. Where shared expenses are involved, the organization should adopt a defensible allocation methodology and apply it consistently.
Organizations should also review federal Form 990-T filings, California exempt organization filings, partnership K-1s, investment statements, contracts, sponsorship agreements, licensing arrangements, and prior-year loss schedules. The goal is to identify areas where California reporting may change or where the organization may need additional documentation before the 2026 return is prepared.
Boards and finance committees should also be aware of the issue. UBTI reporting is not merely a tax return preparation issue. It may affect budgeting, governance, compliance, risk management, and audit readiness.
How The Karam Firm Can Help
The Karam Firm, PLLC assists exempt organizations, nonprofits, tax-exempt affiliates, and businesses with federal and state tax compliance, tax controversy, refund claims, penalty matters, and California tax issues.
For organizations affected by SB 711 and California’s updated UBTI conformity, The Karam Firm can help evaluate whether activities generate unrelated business taxable income, review federal and California reporting positions, assess exposure from prior filings, prepare for FTB implementation guidance, and respond to notices or audits.
California tax disputes often turn on documentation, timing, and procedural posture. Exempt organizations should address these issues before a return is filed or an FTB notice is issued, not after records are incomplete or deadlines have passed.
Disclaimer
This article is for general informational purposes only and does not constitute legal, tax, accounting, or other professional advice. Reading this article does not create an attorney-client relationship with The Karam Firm, PLLC or any of its attorneys. Tax laws, California conformity rules, exempt organization reporting requirements, and FTB procedures may change, and the application of those rules depends on the specific facts and circumstances of each taxpayer. Taxpayers and exempt organizations should consult qualified counsel before filing a return, responding to a tax notice, submitting a refund claim, requesting penalty or interest abatement, changing a reporting position, or taking any tax position.
