Unrelated Business Income Tax - Policy & Procedures

 

1. Background Information

The university's primary purpose is the fulfillment of the institution's instructional, research or public service missions. Most university activities are either directly or indirectly related to these primary purposes. Any university activity not substantially related can be categorized as unrelated to the primary purpose. Unrelated business income (UBI) is defined as gross income from any regularly conducted trade or business that is not substantially related to the university's educational and other exempt purposes.

The university is tax-exempt for its non-profit primary purpose and taxable at state and federal levels for business activities that are not substantially related to the tax-exempt purpose. Passive income sources such as dividends, interest, annuities, royalties, real property rent, do not represent a trade or business activity and are therefore exempt. The purpose of the UBI tax laws is to prevent tax-exempt entities from having an unfair advantage when engaging in activities that compete with the private sector. The private sector incurs corporate income tax on all income, while exempt entities incur taxes only on unrelated income. 

2. Policy Statement

Program managers of proposed and existing campus activities shall review their operations for possible exposure to Unrelated Business Income Tax (UBIT). Operations should not be terminated simply to avoid paying taxes. These programs must have proper pricing structures to allow for the cost of operations and the additional burdens of the tax.

If a program manager determines that an activity being conducted will result in UBI, they must contact the Boulder Campus Controller’s Office at salestax@colorado.edu. This information will be reported to the OUC, which files a consolidated Unrelated Business Income Tax Return (990T) for the University System. In order to determine if there is net taxable income or loss, the revenues and expenses of the program are analyzed. Individual departments are responsible for taxes, interest and penalties for failure to identify and report taxable activity.

3. Procedure

Determination of whether an activity produces unrelated business taxable income can be made by answering the questions below.

  • Is the activity regularly carried on?
    • A specific business activity is regularly carried on if it is conducted with a frequency, continuity, and manner of pursuit comparable to the conduct of the same or similar activity by a taxable organization.
    • An activity is regularly carried on if it is conducted:
      • intermittently year-round
      • during a significant portion of the season for a seasonal type of business
    • But an activity is not regularly carried on if it is conducted:
      • on a very infrequent basis (once or twice a year)
      • for only a short period of the year
      • without competitive or promotional efforts.
  • Is the activity substantially related to the exempt purposes of the university? To be substantially related, the business activity must contribute importantly to the accomplishment of a purpose for which the university was granted tax exemption, other than the mere production of income to support such purpose. The primary exempt purpose of a college or university is education and research. The IRS regulations define "educational" as including:
    • the instruction or training of the individual for the purpose of improving or developing his/her capabilities
    • the instruction of the public on subjects useful to the individual and beneficial to the community
  • Is the activity conducted with volunteer services? Any business activity in which substantially all (85% or more) of the work is performed by volunteers is specifically exempted from unrelated business income tax.
  • Is the activity primarily for the convenience of faculty, staff or students? The activities are exempt regardless of their nature. Examples are food service, laundry, telephone service and vending machines.
  • Is the income derived from debt-financed property? This directive is quite complex, and each activity must be examined on a case-by-case basis.
  • Is the income received from a controlled (ownership of 80% or more) corporation? All but dividend income may be subject to the tax. Again, due to complexities, this should be examined individually.
  • Is income from the rental of real property? Rental income is tax-exempt, but if significant services, such as set-up, cleaning and laundry service, are also provided, then the income is usually taxable.
  • Is the income from advertising? The activity is probably taxable if so.
  • Is the income derived from research? The income is tax-exempt except for testing or inspection of materials, products, design or construction of buildings, etc. The nature of the entity (commercial, governmental, non-profit) for which the research is performed is irrelevant.

4. Examples

Some examples of activities that may generate UBIT are provided below. It is necessary to analyze each activity, on a case-by-case basis, to determine if it results in UBIT.

  • External sales of advertising such as print advertisements, scoreboard advertisements, and revenue received from advertisements run during radio and television shows
  • Catering and food service activities
  • Entertainment events
  • Travel-study tours
  • Merchandising services

5. Resources

In addition to reviewing activities based upon the above guidelines, managers should make certain that adequate records are in place to account for revenues and allocable expenditures of exempt and non-exempt activities. FOPPS must clearly delineate tax-exempt and taxable operations.

Questions pertaining to Unrelated Business Income Tax should be directed to salestax@colorado.edu.

UBIT