Division of Finance & Administration

Unrelated Business Income Tax

Effective January 1, 2018, activities subject to Unrelated Business Income Tax (UBIT) can no longer be aggregated to offset gains with losses. Under the new federal Tax Law and Job Cuts Act, each activity must be segregated: those with profits will have to pay UBIT, and those with losses will accumulate losses.

Payroll & Tax Services will be working with units that have activities subject to UBIT. In addition, some fundraising activities may be affected; for example, when athletic tickets are given in exchange for a donation, the donation is no longer tax-deductible. Many other provisions for colleges and universities in the law do not apply to UVM because we are too small. Contact Payroll & Tax Services at 656-2903.

UVM is exempt from federal income taxation as a 501(c)(3) tax-exempt organization; however, the university is required to pay federal income tax on net income from activities that are unrelated to the three key components of the tax-exempt mission of the university: teaching, research, and public service. Unrelated Business Income Tax (UBIT) is the federal income tax imposed on the Unrelated Business Income generated by tax-exempt organizations.

Unrelated Business Income consists of income the University generates from activities that are not related to its tax-exempt activities. Income is considered to be “unrelated” if all of the conditions listed below are met:

The activity is conducted as a trade or business;
The activity is regularly carried out, and;
The activity is not substantially related to the exempt mission of the university.

1. The income generated is from a trade or business

The term "trade or business" generally includes any activity carried on for the production of income from selling goods or performing services. An activity does not lose its identity as a trade or business merely because it is carried on within a larger group of similar activities that may or may not be related to the exempt purposes of the organization.

For example, soliciting, selling, and publishing commercial advertising in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose is still a trade or business activity.

2. The activity is conducted on a regular basis

Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Generally, income production or fundraising activities lasting only a short period of time conducted on an annual basis are not considered regularly carried on.

For example, a tax-exempt organization’s operation of a sandwich stand for two weeks at a state fair would not be the regular conduct of a trade or business. The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. By contrast, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business.

3. The activity is not substantially related to the exempt mission of the university

UVM's primary mission is to provide instruction, research, and public service. A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose. Whether an activity contributes depends in each case on the facts involved.

It is how the income is generated that is important, and how the income is generated should not be confused with how the income is used. If income from an activity is used for mission-specific purposes, this does not change an "unrelated" activity to a related activity.

In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they are intended to serve. For example, to the extent that an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. The part of the activity that is more than is needed to accomplish the exempt purpose is an unrelated trade or business.

Exceptions

Income generated from the following activities is not subject to UBIT, even if all three unrelated business income tests described above have been met:

Activities conducted for the convenience of the students, faculty, and staff
Rental income
Applies to real estate only
Exclusion may be lost if services (e.g., catering) are provided
Exclusion may be lost (partially or fully) if personal property is included (e.g., audio visual equipment, tables, and chairs)
Capital gain transactions
Interest and dividends
Royalty income
Distribution of low-cost research
Research activities
Activity must constitute research

If activity is for "routine testing" with no value, exception does not apply.

The rules concerning UBIT are very complex and there are exceptions to the general rules described in this policy. Determining whether income is subject to UBIT can be subjective and depends on the facts and circumstances of each case.

Roles & Responsibilities

Each UVM department is responsible for notifying in writing the Payroll & Tax Services Tax Administrator (Tax Administrator) of any revenues being generated that may be subject to UBIT for an analysis and interpretation.
Departments with reportable unrelated business income are required to forward a summary of unrelated revenues and expenses by August 15th, following the close of fiscal year-end, to the Tax Manager.
UVM is required to file IRS Form 990-T to report unrelated business income. The Tax Administrator coordinates the compilation of reportable unrelated business income, and prepares Form 990-T on behalf of the University. Typically a request for an extension to file is applied for and received since all endowment partnership Schedules K-1 are not received in time for the filing deadline.
Estimated tax payments are made to the IRS on a quarterly basis by the Tax Administrator. Once Form 990-T is prepared and filed, the calculated UBIT expense is allocated to the respective departments via Journal Entry via Account 61017.
IRS rules require that Forms 990-T filed after August 17, 2006 be available for public inspection and copying for three years after the due date of the return. Requests to inspect the Form 990-T filed by UVM should be directed to the Tax Administrator. The IRS is also required to make 990-T returns publicly available.