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 a number of 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.
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 into 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.