Unrelated Business Income Tax

UBI Defined and General Information

For all public and private colleges and universities, an activity is unrelated and subject to unrelated business income tax if it meets three requirements:

It is a trade or business,
It is regularly carried on, and
It is not substantially related to furthering the exempt purpose of the university.

The Internal Revenue Code contains several modifications, exclusions, and exceptions to unrelated business income. For example, dividends, interest, certain other investment income, royalties, certain rental income, certain income from research activities, and gains or losses from the disposition of property are excluded when computing UBI. In addition, the following activities are specifically excluded from the definition of UBI:

Volunteer Labor – Any trade or business is excluded in which substantially all the work is performed for the university without compensation. Some fundraising activities may meet this exception.
Convenience of Members- Any trade or business is excluded that is carried on by the university primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this are the student dining facilities operated by Business Services.
Selling Donated Merchandise- Any trade or business is excluded that consists of selling merchandise, substantially all of which the university received as gifts or contributions.

Once it has been determined that the university is carrying out an unrelated business income activity, it may be liable for tax on the UBI. An exempt organization that has $1,000 or more of gross income from UBI must file IRS Form 990-T annually.

Identifying UBI

One method for identifying UBI is to find it in new revenue-generating contracts before the activity occurs.  To further this end, Finance and Administration has adopted the operating policy  4-OP-D-3 Revenue Generating Contracts .   This policy requires a review by the University Controller for all contracts entered by the University and any of its subordinate divisions, departments, institutes, and centers, by which will generate gross revenues of $10,000 or more to identify any and all Federal and State tax issues.   Tax Services is the University Controller’s designee to perform these reviews.

A second method for identifying UBI is to perform an annual review of departmental budgets that are likely to generate UBI.  Tax Services has determined that these include all budgets in Auxiliary, Activities, and Athletic fund types.  Annually, Tax Administration will survey all of these budgets for UBI  (UBIT Survey ) .  Departments are basically asked to sort their sources of revenue for the fiscal year by category and to provide a written description of the purposes of the account and how the revenues are generated.  Tax Administration reviews these surveys and performs follow-up activities based on the results.  These surveys are the starting point for the work papers that will support the data we report on the annual IRS 990-T tax return.

Most forms of advertising that generate revenue for the University
Rental or sales of mailing lists
Routine analytical or testing services to non-university users
Travel tours for alumni or tour purpose is not authentic educational activity
Renting equipment to non-university personnel
Excess computer time sold to an outside company
Online stores linked to University web sites
Printing or audio visual sales and services to non-university users
Parking revenues generated from general public attendance at a non-university sponsored even
in addition to the activity itself, consideration must be given to where the activity is conducted. If any portion of a property, whose construction was financed with tax-exempt bonds, is used to conduct unrelated business activities, the bond financing could lose its tax-exempt status. The percentage of unrelated activity taking place on the property must be monitored to ensure the overall use of the facility by exempt activities is sufficient to prevent challenges to the tax-exempt status of the property’s financing.

How are the University’s unrelated business income taxes reported to the IRS?

Once a year, Tax & Compliance distributes an electronic survey to all auxiliary, activity, and athletic funds budget managers requesting information about the previous fiscal year’s revenues. This survey requires budget managers to categorize their revenues by the following sources: students, faculty/staff, university departments, foundations, state government, general public, and other. Accordingly, it is important that these departments have a means of classifying and documenting these sources of sales revenue properly. Tax & Compliance reviews each survey to determine whether any potentially unrelated revenues were earned during the previous fiscal year. Departments that are found to have the potential for unrelated business revenue will receive follow-up contact from Tax & Compliance to further assess the details related to any unrelated business revenue.

Unrelated Business Income Tax (UBIT) Questions:

An activity may be considered an unrelated trade or business if its operations meet ALL the criteria listed below:

Trade or Business
The term “trade or business” generally includes any activity carried on producing income from selling goods or performing services. A trade or business activity is one in which a profit is expected to be made. However, when an activity that is carried on for a profit incurs a loss, no part of the trade or business is excluded from the for-profit classification merely because its current operations does not result in a profit in a particular year. In addition, an activity does not lose its identity as a trade or business when it is carried on within a larger complex of other endeavors which may be related to the exempt purposes of the University.

Regularly Carried On

The trade or business must also be considered “regularly carried on “. This test considers the frequency, continuity of operations and the way the activities are conducted. Comparisons of the university activity must be made with similar commercial activities to arrive at a determination whether the activity may be taxable.

Not Substantially Related to Exempt Purposes
A regularly conducted trade or business is subject to tax if it is also not substantially related to the exercise or performance of the exempt functions of the University. The University’s need for the income from the activity to further its exempt activities does not change the taxable nature of the income produced from the unrelated activity.

What types of activities are generally included in UBIT?

Unrelated business income can be generated from a large variety of university activities. As a rule, providing goods or services to the public (alumni is included in this category) is considered a taxable activity. Other examples of activities that would most likely generate UBIT are:
- Most forms of advertising that generate revenue for the University
- Rental or sales of mailing lists
- Routine analytical or testing services to non-university users
- Travel tours for alumni or tour purpose is not authentic educational activity
- Renting equipment to non-university personnel
- Excess computer time sold to an outside company
- Online stores linked to University web sites
- Printing or audio visual sales and services to non-university users
- Parking revenues generated from general public attendance at a non-university sponsored even
In addition to the activity itself, consideration must be given to where the activity is conducted. If any portion of a property, whose construction was financed with tax-exempt bonds, is used to conduct unrelated business activities, the bond financing could lose its tax-exempt status. The percentage of unrelated activity taking place on the property must be monitored to ensure the overall use of the facility by exempt activities is sufficient to prevent challenges to the tax-exempt status of the property’s financing.

What types of activities are generally excluded from UBIT?

There are specific activities identified in the federal tax law which are exempted from unrelated business income tax even though they may otherwise have the characteristics of an unrelated trade or business:
Real Property Rents
Rent collected from outside entities is considered passive and not subject to UBIT. However, the exclusion may be lost if personal services or use of equipment are included in the rental agreement.
Income from Research Activities
In general, revenue received from research activities is excluded from unrelated business income taxes. There are certain situations that may require further analysis to determine if they fit the research exception. For example, ordinary testing and inspection of products or materials is normally not exempt from UBIT.
Member Convenience Activities
An unrelated activity conducted by the University for the benefit of its members (students, faculty, and staff) is not subject to tax unless the income is generated from sales to non-members. In this case only the non-member generated income is taxable.
Dividends, Interest, Annuities, and Royalties
These sources of income are considered passive and are generally excluded from UBIT. However, consideration must be given to the investment generating the income before a determination to exclude from UBIT. Investments in controlled organizations, partnerships, “S” Corporations, etc. will generally result in UBIT.

How are the University’s UBIT reported to the IRS?

Tax & Compliance reviews each survey to determine whether any potentially unrelated revenues were earned during the previous fiscal year. Departments that are found to have the potential for unrelated business revenue will receive follow-up contact from Tax & Compliance to further assess the details related to any unrelated business revenue.