Unrelated Business Income Tax (UBIT)
Overview
Loyola University of Chicago is categorized as a not for profit organization under IRC Section 501(c)(3). Generally, exempt organizations are not subject to taxes on income generated by activities related to its exempt purpose. However, unrelated business income tax is assessed when the following criteria are present in an activity an exempt organization is engaged in:
- The activity constitutes as a trade or business
- The activity is regularly carried on
- The activity is not substantially related to the performance of the organization’s exempt purpose
The net income derived from these activities are considered unrelated business income (UBI) to the organization and are subject to unrelated business income tax (UBIT), on both the Federal and State levels.
Trade or Business
The Internal Revenue Service (IRS) defines a trade or business as those activities conducted for the production of income from selling goods or performing services, with the intent to make a profit.
For example, soliciting, selling, and publishing commercial advertising is considered a trade or business even though the proceeds of those sales may be used to further the organization’s exempt purpose.
Regularly Carried On
The IRS classifies an activity to be “regularly carried on” when the activity has shown frequency and continuity and are pursued in a similar manner comparable to commercial activities by for-profit entities.
For example, operating a conference event space, year-round, would be considered a trade or business that is regularly carried on.
Not Substantially Related
An activity is considered not substantially related to an organization’s exempt purpose when it doesn’t contribute importantly to accomplishing that purpose. Trade or business is related to exempt purposes, in the statutory sense, only when the conduct of the business activities has causal relationship to achieving exempt purposes (other than through the production of income). The causal relationship must be substantial.
For example, an exempt organization is engaged in providing education to students. When a university houses students in a dormitory, the rental of the rooms to the students is directly related to their education. If the University rents dorm rooms to the public, the activity is no longer related to the exempt purpose.
Exclusions from UBIT
Some typical exclusions from unrelated business income tax are the following:
- Member Convenience: income carried on for the convenience of the exempt organization’s students, faculty and staff
- Investment income: dividends, interest, capital gains, and other income derived from the holding of investments
- Royalty Income: passive income for the use of property or rights
- Real Property Rental Income: rents received from real property (ex. buildings, apartments, commercial space)
- If the property is rented with services, the income could be subject to UBIT
- Personal Property Rental Income: rents received from personal property (ex. furniture, household appliances) that are an incidental in amount of the total rents received under a lease for a real property, generally not exceeding 10%
- If the amount of rents exceeds 10%, the income could be subject to UBIT
- Fixed Percentage Rents: rental income received based on a fixed percentage of gross revenue
- Percentage rents from real or incidental personal property that are based on net income are subject to UBIT
- Gain/Loss from Sale of Assets: gains or losses from a sale, exchange, or disposal of property, other than inventory, stock in trade or property held primarily for sale to customers
- Government research: income from the research conducted for the U.S., its instrumentalities or agencies, a State, or its instrumentalities.
- Volunteer Labor: if substantially all (at least 85%) of the work is performed by volunteers without compensation
Examples of Activities Subject to UBI
- Income from advertising placed by a company in an athletic or performing arts program
- Sale of mailing lists or other data to commercial entities
- Gift shop sales (evaluated on an item-by-item basis)
- Sale of advertising space in a LUC regularly scheduled periodical or newsletter
- Sales of art objects at exhibits
- A hyperlink from the LUC website to a sponsor’s website where an endorsement appears by LUC for the sponsor’s product
- Commercially sponsored scientific research if the results are not made available to the public or directed toward benefiting the public
- Rental of apartments to the general public where the building is financed by tax exempt bonds
- Rental of sports facilities such as stadiums, soccer fields, etc. where services are provided
- Travel tour programs operated by a college/department or the alumni association that are not authentic educational activities (i.e. sightseeing, recreational, social, cruise, etc.)
- Rental payments for the lease of space on antenna towers and transmission facilities
- Corporate sponsorship payments where the sponsor receives a substantial return benefit that has a fair market value of more than 2 percent of the entire payment
- Pharmacy sales to the general public
- Sale of merchandise (evaluated on an item-by-item basis)
- Joint ventures with for-profit organizations that do not serve the University’s exempt purposes and do benefit the for-profit partner and/or insiders
- Entertainment events operated in a commercial manner and not part of an educational program
- Exclusive provider arrangements where the University performs substantial services
- Direct operation of parking lots to the general public
- Hotel room sales to the general public and alumni
- Dual use of assets or facilities for public events
- Intellectual property where substantial services are provided in connection with the activity (facts and circumstances must be evaluated)
- A fitness center sells memberships to the general public
- Book publishing where the University owns the rights to a book which does not relate to the educational purposes of the University (i.e. exploits the book in a commercial manner)
UBI Revenue Review
The University must report all unrelated business income (UBI) on its annual income tax return, therefore identification of UBI is critical in order for the University to be in compliance with tax regulations. If your department has a new revenue stream that is for any of the examples noted above or for another service activity, then the revenue needs to be evaluated for UBI. The UBI Questionnaire should be completed and sent to the Tax department for review.
For more information, please refer to the Unrelated Business Income Overview presentation.
LUC Contacts
For further guidance and information, please contact the below:
Alyssa Beneventi
Tax Manager
Email: agerdes1@luc.edu
Maria Araque
VP, Tax & Financial Compliance
Email: maraque@luc.edu
Reference: IRS Publication 598
Overview
Loyola University of Chicago is categorized as a not for profit organization under IRC Section 501(c)(3). Generally, exempt organizations are not subject to taxes on income generated by activities related to its exempt purpose. However, unrelated business income tax is assessed when the following criteria are present in an activity an exempt organization is engaged in:
- The activity constitutes as a trade or business
- The activity is regularly carried on
- The activity is not substantially related to the performance of the organization’s exempt purpose
The net income derived from these activities are considered unrelated business income (UBI) to the organization and are subject to unrelated business income tax (UBIT), on both the Federal and State levels.
Trade or Business
The Internal Revenue Service (IRS) defines a trade or business as those activities conducted for the production of income from selling goods or performing services, with the intent to make a profit.
For example, soliciting, selling, and publishing commercial advertising is considered a trade or business even though the proceeds of those sales may be used to further the organization’s exempt purpose.
Regularly Carried On
The IRS classifies an activity to be “regularly carried on” when the activity has shown frequency and continuity and are pursued in a similar manner comparable to commercial activities by for-profit entities.
For example, operating a conference event space, year-round, would be considered a trade or business that is regularly carried on.
Not Substantially Related
An activity is considered not substantially related to an organization’s exempt purpose when it doesn’t contribute importantly to accomplishing that purpose. Trade or business is related to exempt purposes, in the statutory sense, only when the conduct of the business activities has causal relationship to achieving exempt purposes (other than through the production of income). The causal relationship must be substantial.
For example, an exempt organization is engaged in providing education to students. When a university houses students in a dormitory, the rental of the rooms to the students is directly related to their education. If the University rents dorm rooms to the public, the activity is no longer related to the exempt purpose.
Exclusions from UBIT
Some typical exclusions from unrelated business income tax are the following:
- Member Convenience: income carried on for the convenience of the exempt organization’s students, faculty and staff
- Investment income: dividends, interest, capital gains, and other income derived from the holding of investments
- Royalty Income: passive income for the use of property or rights
- Real Property Rental Income: rents received from real property (ex. buildings, apartments, commercial space)
- If the property is rented with services, the income could be subject to UBIT
- Personal Property Rental Income: rents received from personal property (ex. furniture, household appliances) that are an incidental in amount of the total rents received under a lease for a real property, generally not exceeding 10%
- If the amount of rents exceeds 10%, the income could be subject to UBIT
- Fixed Percentage Rents: rental income received based on a fixed percentage of gross revenue
- Percentage rents from real or incidental personal property that are based on net income are subject to UBIT
- Gain/Loss from Sale of Assets: gains or losses from a sale, exchange, or disposal of property, other than inventory, stock in trade or property held primarily for sale to customers
- Government research: income from the research conducted for the U.S., its instrumentalities or agencies, a State, or its instrumentalities.
- Volunteer Labor: if substantially all (at least 85%) of the work is performed by volunteers without compensation
Examples of Activities Subject to UBI
- Income from advertising placed by a company in an athletic or performing arts program
- Sale of mailing lists or other data to commercial entities
- Gift shop sales (evaluated on an item-by-item basis)
- Sale of advertising space in a LUC regularly scheduled periodical or newsletter
- Sales of art objects at exhibits
- A hyperlink from the LUC website to a sponsor’s website where an endorsement appears by LUC for the sponsor’s product
- Commercially sponsored scientific research if the results are not made available to the public or directed toward benefiting the public
- Rental of apartments to the general public where the building is financed by tax exempt bonds
- Rental of sports facilities such as stadiums, soccer fields, etc. where services are provided
- Travel tour programs operated by a college/department or the alumni association that are not authentic educational activities (i.e. sightseeing, recreational, social, cruise, etc.)
- Rental payments for the lease of space on antenna towers and transmission facilities
- Corporate sponsorship payments where the sponsor receives a substantial return benefit that has a fair market value of more than 2 percent of the entire payment
- Pharmacy sales to the general public
- Sale of merchandise (evaluated on an item-by-item basis)
- Joint ventures with for-profit organizations that do not serve the University’s exempt purposes and do benefit the for-profit partner and/or insiders
- Entertainment events operated in a commercial manner and not part of an educational program
- Exclusive provider arrangements where the University performs substantial services
- Direct operation of parking lots to the general public
- Hotel room sales to the general public and alumni
- Dual use of assets or facilities for public events
- Intellectual property where substantial services are provided in connection with the activity (facts and circumstances must be evaluated)
- A fitness center sells memberships to the general public
- Book publishing where the University owns the rights to a book which does not relate to the educational purposes of the University (i.e. exploits the book in a commercial manner)
UBI Revenue Review
The University must report all unrelated business income (UBI) on its annual income tax return, therefore identification of UBI is critical in order for the University to be in compliance with tax regulations. If your department has a new revenue stream that is for any of the examples noted above or for another service activity, then the revenue needs to be evaluated for UBI. The UBI Questionnaire should be completed and sent to the Tax department for review.
For more information, please refer to the Unrelated Business Income Overview presentation.
LUC Contacts
For further guidance and information, please contact the below:
Alyssa Beneventi
Tax Manager
Email: agerdes1@luc.edu
Maria Araque
VP, Tax & Financial Compliance
Email: maraque@luc.edu
Reference: IRS Publication 598