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 501(c)(3) organization; and as an instrumentality of the State of Indiana. As such, income derived from engaging in activities that further Purdue’s mission is exempt from federal income taxation, as those activities are related to the purpose for which the University was granted the exemption. Activities that contribute to Purdue’s exempt purpose are broadly categorized as education, research and community service.
However, Purdue University 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, research or other functions or operations that constitute the basis for the University’s exempt status.
In order for income to be considered Unrelated Business Income (UBI), the following questions need to be asked:
- Is the activity a trade or business? The term trade or business generally includes any activity conducted for the production of income from selling goods or performing services. An activity must be conducted with the intent of making a profit to constitute a trade or business.
- Is the activity regularly conducted? Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.
- Is the activity not substantially related to the University’s tax exempt mission? A business activity is not substantially related to an organization’s exempt purpose if it does not contribute significantly to accomplishing that purpose.
If the answer to each of the above questions is yes, the income from a given activity may be subject to UBIT.
Statutory Exceptions – Even if an activity meets the definition of an unrelated trade or business, it may not be subject to tax if it meets the following criteria:
- Volunteer Labor – Any activity in which substantially all the work of the trade or business (85% or greater) is performed without compensation is exempted from tax.
- Convenience of University Members – Any unrelated activity conducted for the convenience of University students, faculty or staff is exempt from tax.
- Donated Merchandise – Any unrelated activity involving the sale of merchandise, substantially all (85% or greater) of which was received as gifts or contributions, is exempt regardless of whether the labor to operate the activity is paid or volunteer.
Modifications to Income – The Internal Revenue Code contains several modifications that have the effect of exempting various kinds of income from UBIT. Though there are exceptions, these include income derived from dividends, interest, annuities, royalties, rents from real property and certain forms of research.
Any further questions regarding UBI issues may be emailed to email@example.com.