The University is required to report any income received from activities that are unrelated to its mission. The IRS established these requirements to avoid unfair competition between non‐profit organizations and for‐profit, taxable businesses. The key principle revolves around the source of the revenue, and not how that revenue is spent. The Federal Form 990-T is used to report the net taxable income from those unrelated activities. The University is also required to file in various states where unrelated business income is derived, as well as the City of Philadelphia (see Business Income and Receipts Tax (BIRT)).
Guidance for Unrelated Business Income
What criteria must activities meet to be considered unrelated business income?
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 for the production of 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.
Regularly Carried On
The trade or business must also be considered “regularly carried on.“ This test considers the frequency, continuity of operations and the manner in which 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 unrelated business income taxes (UBIT)?
Unrelated business income can be generated from a large variety of university activities. As a general rule, providing goods or services to the public (alumni are included in this category) is considered a taxable activity. Other examples of activities that would most likely generate UBIT are:
- Laboratory services
- Rental or real estate when income is based upon net profits
- Routine analytical or testing services to non-university users
- Private use of tax-exempt bond financed facilities
- 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 event
- Career Center services for alumni
- Equipment Rentals and Sales to non-university members
- Merchandise Sales and Services to the public, such as pharmacy items and reprographics
- Certain fee for service arrangements
- Police services, when the services are provided for the benefit and protection of the vendor, and are beyond the normal and necessary protection provided for university property and people
- Sponsorship payment – for a payment to constitute a qualified sponsorship payment, there must be no arrangement or expectation that the sponsor will receive any substantial return benefit for its payment, other than the use or acknowledgement of the sponsor’s name or logo
- Use of recreational or athletic facilities – income received from public, alumni and spouse or children of students, faculty, and staff
- Use of athletic facilities by professional teams
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, fee for service 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 UBI
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 insure 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 is the University’s unrelated business income activities reported?
Once a year, Corporate Tax distributes an electronic questionnaire & worksheet requesting information about the previous fiscal year’s potential unrelated business revenues. Each School/Center is required to answer the questions on the questionnaire and complete the financial information on the worksheet. The financial data reported on the worksheet is used to calculate the Federal net income tax liability, Philadelphia Business Income & Receipt Taxes, net income, and gross receipts.
Some activities are already known to be unrelated business activity. For new activities, Corporate Tax reviews each questionnaire to determine whether that activity is subject to Unrelated Business Income Tax (UBIT). If the new activity is subject to UBIT, an income/loss worksheet must be submitted to Corporate Tax to calculate the tax liability.
Who should I contact with other questions about UBIT?
Corporate Tax is available to help you with other, specific questions you may have regarding unrelated business income taxes.