HIGHER EDUCATION

Tori Ng Manager, CPA, MBA

08 October 2017

What is unrelated business taxable income (UBTI)?
Per the Internal Revenue Code Section 512(a)(1), UBTI is “the gross income derived by any organization from any unrelated trade or business regularly carried on by it, less deductions allowed … which are directly connected with the trade or business.”

There are three components in the definition that should be evaluated in determining whether an entity generates unrelated business income.  Colleges and Universities are generally tax-exempt organizations; however, they are still subject to an income tax on their unrelated business taxable income. To generate unrelated business income, a revenue-producing activity must:

  • be conducted as a trade or business (primary purpose is earning a
    profit),
  • be regularly carried, and
  • not be substantially related to the institution’s tax-exempt purpose.

If any of the above elements are missing, the institution does not have UBTI.

Below are the potential unrelated business income activities that
are subject to unrelated business income tax (UBIT):

  • use of recreational facilities by the general public
  • rental of outdoor recreation of equipment
  • dormitory rentals to the general public
  • rental of laboratory space and laboratory equipment to the general public
  • advertising income
  • corporate Sponsorship
  • operation of parking lots/sale of parking space to the general public
    professional entertainment events
  • use of recreational facilities by the general public
  • summer sports camps
  • conferences, events and training programs
  • athletic events/television and broadcast rights
  • catalog sales to non-university customers at the bookstore
  • sale of advertising space in magazine/newspaper
  • sale of printing and reprographic services to the general public
  • sale of telephone, web, and mail services
  • rental of space on radio antenna tower
  • bookstore’s online sales to the general public

A key concept in determining unrelated business income is distinguishing between institutional members and the general public. Institutional members are staff, faculty, students, or patients. The general public is defined as non-college or non-university members including alumni, spouses, dependents, parents, and guests.

If the college or university meets all three elements above, there are further exceptions that may be utilized to exclude the income from income tax. For example, most passive income is not subject to UBIT.

Some examples include:

  • interest
  • dividends
  • royalties
  • capital gains
  • annuities
  • rents from real property1

1 Rents from real property may be taxed when there is acquisition debt against the property. Please consult your tax advisor for further information.

The IRS continues to challenge UBIT for many institutions. The key is to carefully track and document all income and losses from all unrelated business income activities.  Before and during an IRS audit, institutions should consult their tax advisors for further assistance in identifying unrelated business income.

If you have any questions about UBIT and your institution, please contact Tori Ng, CPA, MBA at 617.471.1120 or [email protected] directly.

 

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