Unrelated Business Income Tax aka ~ UBIT

1. Unrelated Business Income Tax aka ~ UBIT Dave McGarry Associate Controller, Financial Reporting & Cost Accounting Controller’s Office

2. Overview • UBIT Background • IRS Definition • Exclusions from UBIT • Problem Areas • Selected Examples Controller’s Office

3. UBIT Background • Congressional Legislation - 1950 • Goal was to eliminate unfair competition • Revenue Act of 1951 • Inclusion of Public Colleges and Universities • Tax Reform Act of 1969 • All tax-exempt entities Controller’s Office

4. IRS Definition • Unrelated business income is defined as gross income derived by an exempt organization from any unrelated trade or business that is regularly carried on. • Three Important Tests • Trade or Business • Regularly Carried On • Not Substantially Related to Exempt Purpose Controller’s Office

5. IRS Definition (cont) • Trade or Business • Includes any activity which is carried on for the production of income from the sale of goods or the performance of services - IRC Sec. 513(c) • At some point the activity must produce a profit • No part may be excluded merely because it does not make a profit • Regularly Carried On • Exhibits frequency and continuity and pursued in a manner similar to comparable commercial activity • Not Substantially Related to Exempt Purpose • Contribute importantly to accomplishment of exempt purpose – IRC Sec. 513(a) Controller’s Office

6. Exclusions from UBIT • Interest, Dividends, and Annuities • Some Exceptions • Rental of Property • Some Exceptions • Sponsored Research • Some Exceptions • Qualified Sponsorship Payments • Some Exceptions Controller’s Office

7. Exclusions (cont) • Business Conducted by Volunteers • Sale of Donated Merchandise • Royalties • Convenience Exception Controller’s Office

8. Problem Areas • University Web Pages • Corporate logos vs links • Sponsorship vs taxable advertizing • Qualified Sponsorship Payments • Substantial return benefit to sponsor • Advertizing in General • Qualitative or comparative language • Price or “savings” information • A call to Action • Product endorsement Controller’s Office

9. Problem Areas (cont) • Travel Tours • Sales to the General Public • Alumni Activities • Summer Camps • Investments • Debt Financed Property Controller’s Office

10. Selected Examples • Web Page Links - UBIT • College web page has direct link to Dell On-line order page • College receives small payment from Dell • Diagnostic Laboratory Testing Services - UBIT • Services available in the community • Students not involved in the testing process • Product Sales – UBIT yes/no • Excess milk from university animals used for teaching purpose • Ice cream and butter sales created from excess milk Controller’s Office

11. Selected Examples (cont) • University Facilities - UBIT • Public allowed to use swimming pool for a fee • Tennis Courts – public charged for use • Golf Course - public charged for use • Parking lots – Public use for non university event • Electric Services – Town customers • University Facilities – Non UBIT • Summer Camps sponsored by the university • Professional performances – public invited to attend • Athletic rental of meeting rooms – no services • Rooms used for educational conferences open to public Controller’s Office

12. Selected Examples (cont) • Rental of University Equipment - UBIT • Renting an Electron microscope to an outside business • Rental of recreational equipment to general public and alumni • Renting street sweeper to town • Advertizing – UBIT maybe • Student Newspaper • Game day programs recognizing sponsorship • General consumer advertizing in scholarly journal • Catering – UBIT yes/no • Wedding receptions, parties open to general public • Departmental faculty retreat Controller’s Office

13. Summary • Unrelated Business Income Tax • Is it a Trade or Business • Regularly Carried On • Substantially Unrelated to Exempt Purpose • There are Exclusions • Real Property rental • Fundamental research Activities • Convenience to Faculty, Staff and Students • When in doubt Ask • Consideration to ALL Facts and circumstances Controller’s Office

14. Questions • Points of Contact • Ken Miller, University Controller • Email millerk@vt.edu Phone 540-231-7448 • Dave McGarry, Financial Reporting and Cost Accounting • Email mcgarrde@vt.edu Phone 540-231-3340 • Barbara Starling, Manager of Financial Reporting • Email starlibs@vt.edu Phone 540-231-8629 • Reference Materials • IRS Publication 598 • http://www.irs.gov/ • University Controller’ Web Page • http://www.controller.vt.edu/