Unrelated Business Income Tax (UBIT) FAR Meeting – July 2, 2015.

Unrelated Business Income Tax (UBIT)Unrelated Business Income Tax (UBIT)

FAR Meeting – July 2, 2015

UBIT BackgroundUBIT Background• First enacted by Congress in 1950 to eliminate unfair

competition between tax-exempt and for-profit organizations.

• Profits no longer automatically tax-exempt merely because they were destined for a charitable or tax-exempt purpose.

• Revenue act of 1951 expanded scope of UBIT to include public colleges and universities.

• First enacted by Congress in 1950 to eliminate unfair competition between tax-exempt and for-profit organizations.

• Profits no longer automatically tax-exempt merely because they were destined for a charitable or tax-exempt purpose.

• Revenue act of 1951 expanded scope of UBIT to include public colleges and universities.

Definition of UBITDefinition of UBITUnrelated business income is defined as gross income derived by an exempt organization from any unrelated trade or business that is regularly carried on.

• Trade or Business• Regularly carried on• Not substantially related to exempt purpose

Unrelated business income is defined as gross income derived by an exempt organization from any unrelated trade or business that is regularly carried on.

• Trade or Business• Regularly carried on• Not substantially related to exempt purpose

Definition of UBITDefinition of UBIT• Trade or business - includes any activity which is carried

on for the production of income from the sale of goods or performance of services.

• Regularly carried on – IRS generally compares time span of comparable commercial activity to time span of activity conducted by exempt org.

• Not substantially related – trade or business not related to purpose that constitutes basis for exemption of that organization (ex. Education). Activity must contribute importantly to the accomplishment of the exempt purpose.

• Trade or business - includes any activity which is carried on for the production of income from the sale of goods or performance of services.

• Regularly carried on – IRS generally compares time span of comparable commercial activity to time span of activity conducted by exempt org.

• Not substantially related – trade or business not related to purpose that constitutes basis for exemption of that organization (ex. Education). Activity must contribute importantly to the accomplishment of the exempt purpose.

Exclusions from UBITExclusions from UBIT• Interest, dividends and annuities• Capital gains• Royalties (Pmt for use of intangible property)• Rent from real property (Exception for svc provided)• Research• Business conducted by volunteers• Convenience of members (Exception for sales to alumni)• Sale of donated merchandise• Qualified sponsorship payment (Exception – advertising)

• Interest, dividends and annuities• Capital gains• Royalties (Pmt for use of intangible property)• Rent from real property (Exception for svc provided)• Research• Business conducted by volunteers• Convenience of members (Exception for sales to alumni)• Sale of donated merchandise• Qualified sponsorship payment (Exception – advertising)

IRS Publication 598Tax on unrelated business income of exempt organizations

IRS Publication 598Tax on unrelated business income of exempt organizations

• http://www.irs.gov/pub/irs-pdf/p598.pdf

1. Organizations subject to the tax

2. Tax and filing requirements

3. Unrelated trade or business

4. Unrelated business taxable income

• http://www.irs.gov/pub/irs-pdf/p598.pdf

1. Organizations subject to the tax

2. Tax and filing requirements

3. Unrelated trade or business

4. Unrelated business taxable income

Ut System policyUTS103 Unrelated Business Income tax

Ut System policyUTS103 Unrelated Business Income tax

• http://www.utsystem.edu/board-of-regents/policy-library/policies/uts103-unrelated-business-income-tax-ubit

1. Annual form 990T

2. Institutional Tax Coordinator

3. Nonfinancial Questionnaire

4. Determination by OGC

5. Reporting

6. Payment of UBIT

• http://www.utsystem.edu/board-of-regents/policy-library/policies/uts103-unrelated-business-income-tax-ubit

1. Annual form 990T

2. Institutional Tax Coordinator

3. Nonfinancial Questionnaire

4. Determination by OGC

5. Reporting

6. Payment of UBIT

Non-financial questionnaire (NFQ)Non-financial questionnaire (NFQ)

• Required for every new revenue-producing contract• Completed by department and forwarded to institutional

tax coordinator– Some sections won’t apply to UTSA; enter “N/A” in those

sections– After my review, I will submit to OGC with my internal

determination, but official determination is made by OGC.– Objective is to show why the revenue should be considered related

or exempt.

• Required for every new revenue-producing contract• Completed by department and forwarded to institutional

tax coordinator– Some sections won’t apply to UTSA; enter “N/A” in those

sections– After my review, I will submit to OGC with my internal

determination, but official determination is made by OGC.– Objective is to show why the revenue should be considered related

or exempt.

Payment of UBITPayment of UBIT• All organizations subject to tax on UBI (except Trusts) are

taxable at corporate rates on that income.• Tax will be assessed based on total System income since

UT System submits a consolidated 990T.

• All organizations subject to tax on UBI (except Trusts) are taxable at corporate rates on that income.

• Tax will be assessed based on total System income since UT System submits a consolidated 990T.

UBIT deductionsUBIT deductions• Expenses incurred as a result of activities

conducted in order to earn the revenue should be tracked since we can reduce taxable income by those costs.– Costs of earning the revenue can include direct

expenses incurred as well as labor costs for time spent by faculty/staff

– If determined to be unrelated and taxable, department will be asked annually for revenue and expense detail to support the deduction.

• Expenses incurred as a result of activities conducted in order to earn the revenue should be tracked since we can reduce taxable income by those costs.– Costs of earning the revenue can include direct

expenses incurred as well as labor costs for time spent by faculty/staff

– If determined to be unrelated and taxable, department will be asked annually for revenue and expense detail to support the deduction.

UBI Tax: Is it worth it?UBI Tax: Is it worth it?• Some feel that the corporate tax rate is so high, UBI

activities are not worth pursuing.• However, even at the highest 39% taxable rate, UTSA

would still keep the remaining 61% of the revenue.• 61% > 0%

• Some feel that the corporate tax rate is so high, UBI activities are not worth pursuing.

• However, even at the highest 39% taxable rate, UTSA would still keep the remaining 61% of the revenue.

• 61% > 0%

Questions?Questions?