7.1.59 Unrelated Business Income Tax (UBIT)

Policy

Educational institutions are typically non-profit entities which are given tax-exempt status by the Internal Revenue Service. As a result of the tax-exempt status, most revenue generating projects are tax-exempt because they are within the educational mission of providing direct and substantial benefits to students. On the other hand, the University may have some revenue-generating projects which may be subject to taxation because the revenue is derived from "unrelated business income" as opposed to "related function income."

Unrelated business income is the revenue derived from year-round activities that have been undertaken solely for the purpose of generating income and are not educationally based. Deciding an activity's status as related or unrelated is of great financial concern since unrelated business income is taxed at a flat rate of approximately 30% while related function income is non-taxable.

It is the responsibility of the Comptroller's Office to file IRS Form 990T in order to comply with Federal tax law. The Form 990T must be filed regardless of whether or not the overall activities result in a tax liability to the University. The IRS calls a return with no tax liability an "information return." It is the responsibility of fiscal agents to notify the Comptroller's Office of all revenue-generating activities as detailed in the guidelines section below.

What Determines Unrelated Business Income?

Income is considered unrelated and taxed at the rate of approximately 30% when all three of the following conditions are met:

1. Revenue is generated from a trade or business. "Trade" or "business" generally includes any activity that generates income from selling goods to the performing of services.
2. The activity of the trade or business is carried on regularly. This is evaluated by comparing the program to similar private sector non-exempt sector organizations. This condition is met if the activity is reasonably similar in frequency, continuity, and manner to the private sector non-exempt organization. For educational institutions, periodic or sporadic income producing activities are considered dissimilar to year-round commercial projects.
3. The business or trade activity is not substantially related to the accomplishment of the tax-exempt organization's purpose. In the case of the University, the purpose of the activity from which revenue is generated must be educationally based if the activity is to be considered tax-exempt.

Guidelines

1. Fiscal agents are to notify the Comptroller's Office of any revenue received in return for services rendered, rental of property, or activities. Although revenue may not be unrelated income, the University must be prepared to demonstrate to the IRS that it has examined each activity that generates revenue and made a valid determination that the activity is or is not "unrelated business income." The Comptroller's Office in conjunction with the fiscal agents shall make the final decision as to whether or not the income is related or unrelated.
2. The use of revenue generated from the activity for the purpose of improving the quality of instruction or activity congruent with the educational mission makes no difference on reporting requirements. It is the source of income that the is the IRS' concern.
3. All revenue information submitted by the fiscal agents will be reviewed by the Comptroller's Office. Fiscal agents may subsequently be asked to complete a financial statement/worksheet. This information will then be used by the Comptroller's Office to prepare the University's consolidated tax return.
4. Comptroller's Office will exclude the following from IRS reporting, any activity which:
   1. Exists primarily for the convenience of the University's students,faculty or staff.
   2. Is infrequent, i.e., the activity is not regularly scheduled andinfrequently carried on.
   3. Is "substantially related to the University's exempt purpose"provided the activity is not carried on to an extent greater thannecessary.
   4. Is not a "trade or business."
   5. Has 85% or more of the income from the activity generated from thesale of donated goods.
   6. Is derived from labor which is at least 85% volunteer.
5. The revenue reports from the fiscal agents to the Comptroller's Office are due after the close of business each June 30 and no later than September 30 each year.

Fiscal agents needing assistance may contact the Comptroller's Office at (309) 438-3106.