Unrelated Business Income Tax (UBIT)
The IRS allows Purdue University, a tax-exempt organization, an exemption from Federal income taxes due to its classification as a Federal Internal Revenue Code Section 501(c)(3) organization; and, as an instrumentality of the State of Indiana. Income derived from engaging in activities that further Purdue’s mission and purpose is exempt from federal income taxation, as those activities are related to the purpose for which the University was granted exemption. However, Purdue is not exempt from federal income taxation on those activities that are “not substantially related” to the exempt purpose of the University, irrespective of whether the income is used to support or carry out the charitable, educational, or other functions or operations that constitute the bases for the University’s exempt status.
Thus, an unrelated business is one in which all three of the following are present:
(1) A trade or business (defined as activity conducted for the production of income from selling goods or performing services).
(2) Regularly carried on (that is not infrequent or sporadic or conducted for a short period or number of times during the year; not intermittent).
(3) Not substantially related to the organization’s exempt purpose.
Unrelated business income (or loss) is to be included on the University’s Exempt Organization Business Income Tax Return (Form 990-T).
Exclusions from the tax. There are certain exclusions from the above general rule. Income from an activity that would normally be deemed unrelated and therefore subject to tax, is nevertheless nontaxable where:
(1) Volunteer workforce. Substantially all the work in carrying out the trade or business activity is performed for the University without compensation. Approximately 85%.
(2) Convenience of members. The business is carried on primarily for the convenience of the University’s members, students, patients, officers, or employees.
(3) Sales of donated merchandise. The selling of merchandise, substantially all of which was received as gifts or contributions to the University.
There are other exceptions that are mentioned in federal regulations, which could apply to Purdue activities that would otherwise be taxable. Some of them include:
- Income from research conducted for any level of the U.S. government, including State.
- Research performed “for any person.”
- Rental of real property.
- Dividends, Interest, Annuities, and Royalties.
- Sales of property, except where held (in inventory or otherwise) primarily for sale in the ordinary course of business.