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.
NOTE: 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.