Unrelated Business Income Tax aka ~ UBIT INTRO ASK QUESTIONS AT ANY TIME DURING THE SESSION Dave McGarry Associate Controller, Financial Reporting & Cost Accounting Controller’s Office

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

UBIT Background Congressional Legislation - 1950 Revenue Act of 1951 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

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

IRS Definition (cont) Trade or Business Regularly Carried On 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) Seasonal activities may still meet the “regularly carried” on test The fact that the profits will be used for an exempt purpose does not make the activity related Controller’s Office

Exclusions from UBIT Interest, Dividends, and Annuities Some Exceptions Rental of Property Sponsored Research Qualified Sponsorship Payments Does anyone see a pattern forming here General exceptions are only as good as the specific facts and circumstances allow Controller’s Office

Exclusions (cont) Business Conducted by Volunteers Sale of Donated Merchandise Royalties Convenience Exception Convenience is a catch all that only applies to customers that are Faculty Staff or students of the university Controller’s Office

Problem Areas University Web Pages Qualified Sponsorship Payments 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

Problem Areas (cont) Travel Tours Sales to the General Public Alumni Activities Summer Camps Investments Debt Financed Property Related activities can become partially or wholly unrelated if size of activity is inconsistent with what is needed by exempt activity. Controller’s Office

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 Revenue from Web Page links on university web sites which send the user directly to product ordering sites would most like be subject to Tax Testing Services - No student involvement (instruction purpose) and competition with local providers would make revenue subject to Tax Product sales – key is the additional processing past what is necessary to meet exempt purpose Controller’s Office

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 The use of these facilities is more than just rent – if significant services are provided to the public along with the actual use of facility – scheduling, cleaning, monitoring uses etc. then the activity is Taxable Above Examples: Swimming Pool, Tennis Courts, Golf Course are UBIT activities Parking Lot would have to be reviewed but most likely would be UBIT Electric Service – cost would be allocated between taxable (town) and non taxable (university) use Controller’s Office

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 Students manage a newspaper as part of curriculum, advertizing sold seen as part of learning process General Ads like relator, attorneys or restrurants don’t serve the educational purpose Controller’s Office

Summary Unrelated Business Income Tax There are Exclusions 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 Subjective analysis of specific facts and circumstance – a small change can make the difference There are generally no absolutes, must look at the details Don’t assume non taxable. Controller’s Office

Questions Points of Contact Reference Materials 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/ QUESTIONS