1. Contra Costa Community College District
Unrelated Business Income Tax: Basics for Community Colleges and Foundations
Nikhil Bassi, EA CPA MST
Internal Auditor
Contra Costa Community College District

2. Introduction
Community Colleges and their Foundations are tax-exempt organizations under state and Federal law. Community Colleges are taxed on unrelated business income, which is income from any trade or business that is not substantially related to its tax exempt mission (e.g. education, training, and workforce development).

3. Have you come across the following?
Facility Rentals?
Parking Lot Rentals?
Rentals of Sports Fields?
Other income generating activities that you’re not sure is totally related to the educational mission of the college?

4. Introduction
In order for income to be considered unrelated business income, it must meet all three criteria outlined below. The income is:
Generated from an activity that is not related to the College’s or Foundation’s tax exempt mission.
Regularly carried on.
Conducted in a business-like manner.

5. Passive Income not subject to tax
The Internal Revenue Code excludes most types of passive income from the definition of unrelated business taxable income.
IRC §512(b)(1) excludes all dividends and interest from tax. IRC §512(b)(2) excludes royalties when measured by gross or taxable income from tax provided that services are not provided by the organization in exchange for the payment.
Rental income from real estate is normally excludable from unrelated business income (Reg. §1.512(b)-1(c)(ii)(a)).

6. Rental Income From Real Property
Rental income from real estate is normally excludable from unrelated business income (Reg. §1.512(b)-1(c)(ii)(a)).
However, amounts paid for the occupancy of space do not qualify as excludable rents if the owner of the property renders services for the convenience of the occupant.

7. Rental Income From Real Property
Services are considered rendered to the occupant if they are primarily for his/her convenience and are other than those usually rendered in connection with the rental of rooms or other space for occupancy only (Reg. §1.512(b)-1(c)(5)).
For example, the provision of maid, linen or food services constitute services rendered for the convenience of the occupant, whereas the furnishing of utilities, the cleaning of public areas (e.g. public entrances and exits, stairways, lobby) and collection of trash do not.

8. Rental Income From Real Property
The operation of a box office and concession stand has been treated as services for the lessee of an auditorium.
The IRS has determined that the rental of parking spaces to the general public is not considered rent from real property, regardless of whether any services are being provided.
Rents dependent on profits or income derived from real property do not qualify for the exclusion unless they are based on a fixed percentage of gross receipts or sales. Rents based on a percentage of net profits are taxable (Reg. §1.512(b)-1 (c)(2)(iii)).

9. Mixed Leases of Real and Personal Property
Where both real and personal property are rented, the rents from personal property are excluded if the rents attributable to the personal property are an “incidental” part of the total rents received under the lease. Determination of the excludable portion of rentals attributable to personal property is based on the following rules:
• 10% or less is considered incidental and not subject to tax;
• % - taxable amount is the portion attributable solely to personal property;
• 51% or more is considered 100% taxable (Reg. §1.512(b)-1(c)(ii)(b)).

10. Rental Income from Personal Property
Income generated by the rental of personal property (i.e. property other than real estate) is generally taxable unless the personal property is rented in conjunction with the rental of real property.
Income generated from rental of personal property may not be subject to unrelated business income tax under the following circumstances:
• the rental is not regularly carried on,
• is substantially related to the University’s exempt purposes
• is rented for substantially below market rates
• or, the rental is primarily for the convenience of students, faculty or staff.

11. Examples Facility Rentals (with services & equipment)
Dorm Room Rentals
Parking Lot Rentals

12. Rentals with Services & Equipment

13. Rentals with Services & Equipment

14. College Dormitory Room Rentals

15. College Dormitory Room Rentals

16. Rental of Parking Lot Spaces

17. Rental of Parking Lot Spaces

18. POP QUIZ! Remember the basics: Is the activity unrelated?
Is it regularly carried on?
Is it conducted in a business-like manner?

19. Question 1
Rumble Ridge Community College rents their soccer field to private coaches to run soccer camps to supplement the Athletics department budget during off times. Field rental occurs on Saturdays, 40 days a year. Market rates are charged.
Change facts – does the answer change?

20. Question 2
Los Flores Junior College rented a parcel of undeveloped land to serve as overflow parking for a music festival on 9/25/2015. Fair value rent was charged. Los Flores is in a rural area, and does not routinely do this sort of thing.
Change facts – does the answer change?

21. Question 3
Kentfield Coast College rents their auditorium for meetings and conferences a couple times a week, year round to Nikola Tesla Corporation and Nippon Hōsō Kyōkai, Inc. The businesses pay $3,000 to use KCC’s audio-visual equipment, and $35,000 to rent the auditorium.
What is rent paid for the auditorium was $25,000?

22. Wrap-up
Any final questions or comments before we close today’s session?
Thank you for your participation!