- Unrelated Business Income Tax Overview
- Identification of UBTI Activities
- Common Types of Activities That Generate UBTI
- Additional Information on Unrelated Business Income
Unrelated Business Income Tax Overview
As a governmental nonprofit the University is generally exempt from income tax under Section 501(c)(3) of the Internal Revenue Code. However, the exemption only extends to activities that are substantially related to its nonprofit educational, research, public service and patient care missions. If the University carries on a trade or business activity unrelated to its exempt purposes, under Section 513 of the Internal Revenue Code the net profit from such activity is considered unrelated taxable income (UBTI) subject to unrelated business income tax (UBIT).
An activity will generate UBTI if it meets the following three requirements:
- the income is derived from a trade or business activity;
- the activity is regularly carried on; and
- the activity is not substantially related to the University's tax-exempt missions.
Trade or Business: The term "trade or business" includes any activity carried on for the production of income from selling goods or services with the intent to generate a profit.
Activities that consistently produce losses must be removed from the University’s annual income tax filing (the Form 990-T, "Exempt Organization Business Income Tax Return") and cannot be used to offset profits generated by other UBTI activities. Note that the intent to profit matters more than actual profitability. Activities don’t have to be profitable every year. However, the IRS will challenge activities which do not generate profits in at least two out of the past five years. Units reporting UBTI will be contacted by this office in the event profitability becomes questionable.
Regularly Carried On: An activity is considered to be “regularly carried on” if it is conducted with a regular frequency and continuity. Income from an activity that occurs only once or on a highly irregular frequency usually will not be deemed UBTI.
Not Substantially Related to Tax-Exempt Missions: An activity is not “substantially related” to exempt purposes if it fails to contribute significantly to accomplishing the University’s nonprofit educational, research, public service and patient care missions. The fact that an activity generates funds used to support the University’s exempt missions is not in and of itself sufficient to establish relatedness.
In determining whether an activity contributes significantly to the accomplishment of an exempt purpose, the extent of the activity is considered. If an activity is conducted on a scale larger than reasonably necessary to serve the exempt purpose, the portion of the activity exceeding exempt purpose needs is treated as an unrelated trade or business.
Identification of UBTI Activities
This office performs yearly reviews of new University revenue activities to identify potential UBTI and contacts business units and departments to determine if they may be engaged in a UBTI-generating activity. However, business officers are strongly encouraged to contact this office if they are contemplating a potential UBTI-generating activity.
Common Types of Activities That Generate UBTI
While not all-inclusive, following is a list of the type of activities that commonly generate UBI in a university environment:
- Rental Payments: Rents from real property are generally excluded from UBTI, while rents from personal property are taxable. In the event of a mix of personal and real property, the entire rental payment is exempt if the portion due to personal property is less than 10%. If the portion is between 10% and 50% personal property, then only the portion attributable to the real property is exempt. If the portion of personal property exceeds 50%, the entire rental payment is subject to tax. The rental exclusion does not apply to leases based upon a percentage of the profit earned by the tenant.
- Research-Related Activities: Income from sponsored research is exempt from UBIT regardless of whether it qialifies as fundamental research or applied research. However, the term “research” does not include activities normally carried on primarily for commercial benefit, such as testing or inspecting products or assays, or designing or constructing equipment to be used in commerce.
- Commercial Consulting: Income from consulting performed through the University (i.e., not contracted by the faculty member personally) which is unrelated to its nonprofit missions is subject to UBIT.
- Bookstore Sales of “Convenience Items”: Sales of certain otherwise taxable items are exempt from UBIT under the "convenience" exception if sold to University students, faculty and staff. The convenience exception applies to the operation of on-campus vending machines, the sale of sundry personal items by the University bookstore, and the laundering of dormitory linens and student clothing. The convenience exception does not apply to items with useful lives of more than one year (e.g., video games and gaming systems, televisions, etc.).
- Sponsorship Payments: Qualified sponsorship payments are exempt from UBIT. A “qualified sponsorship payment” is defined as a payment made by a corporate sponsor for which it receives no substantial return benefit other than the use or acknowledgement of its business name, logo, or product lines. "Use or acknowledgement" does not include advertising (defined as qualitative or comparative descriptions of the sponsor’s products or an inducement to buy) or other services provided to the sponsor in exchange for the payment. Any income from the provision of advertising or other services, including the right to use University trademarks or logos, is subject to UBIT.
- Advertising: The sale of advertising generally is taxable if it appears in a University newsletter, magazine, scholarly journal, phonebook, or sports programs. However, sales of advertising does not generate UBTI if the activity contributes to the University's educational mission through the training of students.
- Travel Tours: Travel tours hosted by the University are subject to UBIT if the tours are intended primarily for the purpose of leisure or entertainment rather than for educational purposes. However, tours accompanied by faculty members who provide educational lectures with a written syllabus are generally considered related to the University’s educational mission and thus not taxable, even if the tour enrollees are not exclusively students.
- Professional Performances: Professional performances by paid entertainers that do not promote the University’s nonprofit missions are subject to UBIT.
- Investments: Dividends, interest, annuities, payments with respect to securities, and loans are generally considered “passive income” and excluded from UBTI. However, income derived from debt-financed assets (other than debt-financed real estate owned by colleges and universities) is taxable.
- Joint Ventures: The University’s ownership interest in a partnership, LLC or other joint venture may generate UBTI if the entity is operated for taxable purposes. Income from an interest in "S" corporation is taxable regardless of the nature of the income.
- Royalties: Royalties derived from the licensing of trademarks, patents or copyrights are considered passive income and excluded from UBTI.
Additional Information on Unrelated Business Income
In addition to the information above, please also refer to IRS Publication 598: Tax on Unrelated Business Income of Exempt Organization.
990-T Public Inspection Copy
In accordance with IRS regulations, the University of Virginia makes its most recent 990-T (Exempt Organization Business Income Tax Return) available for public inspection.
Please contact this office to obtain a copy of the most recent 990-T.