1. UF & UBIT: Unrelated Business Income Tax
Presented by:
Andrea Newman, CPA
August 16, 2018

2. Objectives Background & Basics of UBI UBI Exclusions
Potential UBI-Generating Activities
Applicable “Real Life” Examples
Tax Reform

3. What is Unrelated Business Income Tax?

4. UBIT
Under Internal Revenue Code Section 115, the University of Florida is tax-exempt as an instrumentality of the State of Florida
Exempt purposes of state colleges and universities include all of the purposes and functions described in Code Section 501(c)(3)
Federal income tax purposes the University may engage in certain activities
Activities:
Charitable
Scientific
Testing for public safety
Literary
Educational
To foster national or international amateur sports competition
Prevention of cruelty to children or animals

5. UBIT Defined
“Income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational or other purpose that is the basis of the organization’s exemption.”
The following three criteria must be
present:
A trade or business
Regularly carried on
Not substantially related
A college or university is generally deemed to have unrelated business taxable income (UBTI) when it realizes gross income from any regularly conducted trade or business that is not substantially related to its educational and other exempt purposes.

6. Is your activity a trade or business?
“Trade or business” – Any activity carried on for the production of income from selling goods or performing services.
If the University/department is selling goods or services to generate income, even if it is conducting the activity within the larger group of activities related to its exempt purpose, the activity is a trade or business.
While the University/department is carrying on its daily exempt function, it could also be carrying on activities that are taxable.
- Important Factor To Consider -
Whether A Profit Motive Exists

7. Is your activity regularly carried on?
Regularly carried on – If activities show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.
Key: The frequency in which for-profit operates.
If an activity is a type that a for-profit entity would conduct on a year-round basis, the same activity by an exempt entity will not be “regularly carried on” if it is for a few weeks.
Regs (c)(2)(i) examples: operation by tax-exempt of-
Sandwich stand for only two weeks at a fair, not a trade or business. For profit generally operates year-round
A commercial parking lot on Saturday of each week year-round would be a trade or business. For profit-same basis.

8. Is your activity not substantially related?
Related to University Exempt Purpose
To be related to the University’s educational or research exempt purpose, there must a substantial causal relationship.
The activity must contribute importantly to the accomplishment of the exempt purpose (other than the University’s need to produce income).
Size & Extent
Particular emphasis is placed on the size and extent of the activity.
If an activity is conducted on a scale larger than reasonably necessary to carry out the exempt purpose, it is more likely to be treated as unrelated.
Dual Use of Assets & Facilities
Use for both exempt and commercial purposes will not necessarily exempt the income derived from commercial use unless the business activity “contributes importantly” to the accomplishment of exempt purposes.

9. Substantially Related Income
Factual Question: Is there a relationship between activity and accomplishment of UF’s exempt purpose?
Direct relation to the University’s exempt purpose.
IRS compares incorporation documents and operations
New activities should be reviewed to ensure consistency with exempt purposes
Just because an activity raises needed funds
for the University/department does not
mean that the activity is exempt

10. Substantially Related Income
Substantially Related: Depends on facts & circumstances of each case
Factors that the IRS and courts have relied on in concluding that an activity is not substantially related:
Fees charged to the general public are comparable to commercial facilities;
Only those that purchase the goods or services are benefited and the benefits are in direct proportion to the fees charged;
The organization furnishes and operates the facilities through its own employees who perform substantial services in providing the activity; and
Maximization of profit is a predominant element in the exempt organization’s conduct of the activity.

11. Objectives Background & Basics of UBI UBI Exclusions
Potential UBI-Generating Activities
Applicable “Real Life” Examples
Tax Reform

12. Exclusions From UBIT Volunteer Labor Convenience of University Members
Activities in which substantially all (85% or more) work is performed by volunteers
Convenience of University Members
Activities operated for the convenience of members, students, patients, or employees
Donated Merchandise
Sales of merchandise that is substantially all (85% or more) donated to the University

13. Excluded From Taxable Income
Dividends
Interest
Annuities
Royalties
Rental income from real property
Income from certain forms of research

14. Royalties Tax, duty or compensation paid to
owners of a patent, copyright, mineral
interest, or other property right for the
use of it or the right to exploit it
Royalty exclusion includes:
Overriding royalties
Net profits royalties
Royalty income received from licenses by the University as the legal and beneficial owner of patents assigned to it
Exception: Royalty income derived in part from the performance of services – payment will not constitute royalty income

15. Rents Rules vary depending on whether they are derived from real or
personal property or from a mixed lease of both real and personal property
Real Property – Generally, rents from real property are excluded:
Property is not debt financed
Additional services are not rendered
Are not dependent on percentage of profits

16. Rents Rental of real estate is generally not taxable
The following may be taxable:
Rental based on income or profits of lessee is taxable
Services other than customary rental may taint rental
Portion for personal property rental is generally taxable
Parking rental is generally taxable
Hotel income is generally taxable
Debt-financed rental is generally taxable
Special rules that apply to Universities, i.e. “qualified organizations”

17. Rents
Personal Property – Generally, rents from personal property are excluded only if there is a mixed lease and the rents attributable to the personal property are an “incidental” part of the total rents received under the lease
Rental of personal property is generally
taxable
Ignored as incidental if value is 10% or less
Separated, if between 10% and 49%
If 50% or more – then it’s all taxable

18. Rents Services provided with the rental Examples:
Other than customary landlord/tenant maintenance
For benefit of the tenant
May render entire rental as taxable
Examples:
Supplying of maid or linen services services
Furnishing of heat and light not services
Cleaning of public entrances, exits, stairways, or lobbies not services
Collection of trash not services
Renting of parking spaces where attendant is on duty services
Providing security services to a
parking garage services

19. Research
Revenues from research performed by a University is excluded from UBI
Conducted for federal/state governments or companies
Fundamental research available to the public
Research does not include ordinary testing or inspection of products
Ordinary testing would include routine, repetitive work where the procedure is merely a matter of quality control and no real intellectual questions are posed

20. Objectives Background & Basics of UBI UBI Exclusions
Potential UBI-Generating Activities
Applicable “Real Life” Examples
Tax Reform

21. Potential UBI-Generating Activities
Advertising
Sales of Merchandise
Licensing Agreements / Affinity Income
Investment Income

22. Advertising
Any language which is an inducement to purchase a product or service
Qualitative or comparative language
Price information
Indication of savings
Endorsements
Call to action

23. Examples of Activities Which May Generate Advertising Income
Sports programs
Scoreboards
Sponsorships of a departmental newsletter
Student newspaper
Periodical advertising
Web-site advertising
TV & radio broadcasting rights

24. Sales of Merchandise
In general, sales of merchandise is separated into three major categories:
Directly educational materials – nontaxable
Non-educational, convenience exception – nontaxable
Other merchandise sales – taxable
Exempt Sales:
IRS College and University Audit Examination Guidelines
Items that are “required or otherwise necessary” for participation in a course of instruction and other educational materials that “further the unstructured intellectual life of the campus community”
Non-educational items that are low in cost and in recurrent demand may fall under the convenience exception

25. Sales of Merchandise Taxable Sales
IRS holds that the “convenience exception” does not apply to items with a useful life of more than one year
Exception: Logo novelty item or logo clothing
Sales to the general public do not fall within the “convenience exception”

26. Sale of Merchandise Unrelated, excluded or related revenue?
Unrelated Examples:
Excluded Examples:
Related Examples:
University book store items sold to Alumni
Non-Education items from a University’s book store sold to students at a university (convenience)
Educational materials from a University’s book store sold to students at a university
University cafeteria providing catering services to other businesses
University catering to university departmental meetings (convenience)
University catering to students, faculty, and staff (similar to excluded since for convenience)
Hospital’s pharmacy sales to non-patients, non-employees
Hospital’s pharmacy sales to employees (convenience)
Hospital pharmacy sale to patients
Sales where volunteer labor is a material factor (volunteer)
Sale of merchandise that was donated

27. Licensing Agreements /Affinity Income
Royalty exclusion is commonly used by exempt organizations to exclude licensing fees from UBIT.
IRS generally agrees so long as the exempt organization plays a passive role in the licensing agreement.
Active Involvement – The IRS views the royalty payment as consideration for services performed and not a royalty.

28. Licensing Agreements /Affinity Income: Rough Set of Guidelines
Avoid providing specific services (i.e. advertising, promotion, endorsements, etc.)
Ok to review materials for quality control
Agreement should expressly state that the organization will not provide specific services
Only services should be “de minimis” or “courtesy” services
Arrangements necessitating substantial services
Create a separate agreement for the service component and allocate a portion of the income to services
Specifically terming the arrangement a “licensing agreement” and referring to the payments as “royalties”
Avoids certain amount of discrepancy

29. Investment Income: K-1’s from Partnerships, S-corps, LLC’s
Included in UBTI:
Partnership, S-Corp, LLC Income
Look for footnote or Code “V”
Passive income generated through use of borrowed funds (specifically debt-financed)
Understand what is generating the partnership or S-Corp Income to determine if it is Unrelated Business Income
Misconception: You do not need to be a general partner or controlling member for UBI to be generated.

30. Investment Income: K-1’s from Partnerships, S-corps, LLC’s
Other Considerations:
State Tax Filings
Some states have no UBI threshold for filing
International Filings
$10,000 penalties for not filing
Forms to look for – 926, 8858 and Reportable Transaction Filings 8886

31. Objectives Background & Basics of UBI UBI Exclusions
Potential UBI-Generating Activities
Applicable “Real Life” Examples
Tax Reform

32. Advertising Exempt Reportable Example Determination Example
Sale of commercial advertising and underwriting time on a campus radio station. Students assist in subscription drives and underwriting and advertising sales programs.
The sale of general consumer advertising and underwriting by students contributes importantly to the University’s educational purpose through the training of students.
Sale of advertising space in souvenir programs for sports events (or music or drama performances).
Not considered to be regularly carried on.
Example
Determination
Sale of commercial advertising space in campus newspapers, journals, magazines, or other periodicals.
The sale of general consumer advertising in a University’s publication is an unrelated trade or business since it does not contribute importantly to the organization’s exempt purpose.
Sale of commercial advertising in sports media guides. Sales are made by a full-time person throughout the year.
The activity is a promotion effort which is rendered over a relatively significant period of time. In addition, the advertising solicitation is conducted in the same manner as a typical commercial enterprise.

33. Bookstore Exempt Reportable Example Determination Example
Sale of books, athletic clothing, general school supplies, computer hardware and software, and items that are low in cost and in recurrent demand to University members.
The sale of items necessary for courses at the University is related to the University’s exempt purpose. The sale of other items may be considered for the convenience of students.
Sales of computers to students or faculty members.
The sale of one computer to a student is substantially related to exempt purpose. Sale of multiple computers, in a single year, is not related.
Example
Determination
Sale of books, athletic clothing, general school supplies, computer hardware and software, and items that are low in cost and in recurrent demand to the general public and alumni.
Sales to members of the general public do not fall under the “convenience” rule and are taxable.**
Sales of computers at a discount to other educational institutions.
The sale of computers to individuals at other educational institutions is not related to the University’s exempt purpose.
**IRS Letter Ruling from 1996 established the IRS’s position that “there is no principle reason” to treat alumni differently than the general public. The convenience exception is limited to the classes of individuals specifically mentioned in the IRC code – members, students, patients, officers, or employees.

34. Bookstore – In general
As a general rule, and in the absence of clearly established special circumstances (such as in the case of a bookstore on a campus located a considerable distance from any commercial facilities) items not directly related to the accomplishment of the educational purposes of a college, and having an ordinary useful life of more than one year (such as radios, television sets, refrigerators, cameras, jewelry, and clothing other than sundry items like hosiery, handkerchiefs, sweaters, sweatshirts, school uniforms, and novelty items) will not be considered items sold for the convenience of students.

35. Bookstore – In general
Novelty items (such as jewelry, beer mugs, pillows, etc. imprinted with the school name or seal), incidental items of wearing apparel (such as school uniforms, sweaters, hosiery, handkerchiefs, etc.), and sundry items generally embracing items of low cost and recurrent demand (such as newspapers, magazines, candy, cigarettes, film, etc.) will be considered as coming within the convenience rule.

36. Career Services Exempt Reportable Example Determination Example
Career services, such as resume critiquing, interview coordination, and other job placement assistance provided to students.
Related to the University’s exempt function.
Example
Determination
Career services, such as resume critiquing, interview coordination, and other job placement assistance provided to alumni for a fee.
Services for alumni is not related to the University’s exempt function.

37. Debt-financed Property
Exempt
Reportable
Example
Determination
Rental of apartments to students and non-University members. The apartment building is subject to a mortgage .
The rules pertaining to debt-financed property do not apply to the University, there is a specific exception that applies to higher educational institutions. Therefore, these rentals are exempt under the exclusion for real property rents.
Example
Determination
Same as exempt example EXCEPT the property is owned by a DSO of the University that does not qualify as a supporting organization under IRC Section 509(a)(3).
The exception only includes affiliated organizations that support educational institutions provided the organization qualifies as a supporting organization under IRC Section 509(a)(3).

38. Equipment Rental Exempt Reportable Example Determination Example
Rental of equipment (e.g., outdoor recreation equipment, scientific instruments, etc.) to University members.
This service is provided for the convenience of the University members.
Example
Determination
Rental of equipment (e.g., outdoor recreation equipment, scientific instruments, etc.) to non-University members.
The rental of equipment to non-University members is not related to the University’s exempt purpose.

39. Equipment Sales Exempt Reportable Example Determination Example
Sale of obsolete equipment to the general public.
Gains and losses from the sale of property are excludable from UBI taxes.
Example
Determination
Sale of electronic equipment (inventory) to non-University members.
The sale of equipment to non-University members is not related to the University’s exempt purpose. In addition, income from inventory and other stock held for sale is not exempt.

40. Facilities Usage (no lease)
Exempt
Reportable
Example
Determination
Rental of facilities to non-University members for conferences and symposiums.
The use of the University’s facilities and services by outside organizations for conducting educational activities is related to the University’s exempt purpose. Even though the conferences are conducted by outside organizations, the activity is considered to be in furtherance of an educational purpose.
Use of recreational facilities for classes offered to the general public and alumni.
The conduct of University clinics, lessons, workshops and seminars at recreational areas, to instruct and educate individuals of all ages in a particular sport, is in furtherance of the University’s educational purpose.
Example
Determination
Use of University-owned golf course by alumni, spouse and guests of students, faculty and staff.
Alumni are not sufficiently distinguishable from the general public. Spouses and guests are also treated as members of the general public and do not fall within the convenience exception.

41. Hotel & Restaurant Operations
Exempt
Reportable
Example
Determination
Sales to students’ , student’s families and friends, prospective students and their families, participants in school functions and activities.
Group of persons broadly defined by the IRS Exempt Organization Division as having a “demonstrable connection” to the exempt purposes of the University.
Example
Determination
Sales to tourists, spectators at sporting events (including alumni), and the general public.
Do not fall within the convenience exception.

42. Entertainment Events Exempt Reportable Example Determination Example
Events conducted in which the school’s own students put on the event (i.e., a play, concert recital, or ballet).
Furtherance of an educational purpose. The students’ participation in performances before audiences is an essential part of their training. Income derives from activities that contribute importantly to the University’s exempt purposes.
Example
Determination
Events involving professional entertainers (i.e. a professional performance involving paid entertainers).
Events are only related to the school’s educational purposes if they are “operated primarily as an integral part of the educational program of the university, but they are unrelated if operated in substantially the same manner as a commercial operation. Therefore, each event needs to be reviewed separately to determine the involvement of students/faculty, if the event was conducted in a commercial manner, and if it contributes importantly to the University’s missions.

43. Rents (lease basis) Exempt Reportable Example Determination Example
Rental of campus building or space within a building. Includes leasing for a fixed periodic fee or a fee that is a percentage of gross income.
Rents from real property are exempt.
Rental of athletic facilities and equipment to non-University members. Revenue is derived from rental of real property (95%) and personal property (5%).
Rents from personal property are not taxable if there is a mixed lease and the rents attributable to the personal property are “incidental” (10% or less).
Example
Determination
Leasing of property for a fee that is based on a percent of net income or profit.
Rents dependent on profits or income derived by the University 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.

44. Parking Facilities Exempt Reportable Example Determination Example
Income from University owned parking facilities used by faculty, staff, and employees.
Necessary for the normal conduct of the University’s mission (i.e. convenience factor).
University enters into a lease with a third party who operates the University’s parking facility and pays fixed rent to the University.
Such payments are not considered UBI, as these payments constitute rent from real property.
Example
Determination
Operation of a parking facility that is used by members of the general public.
This activity is not substantially related to the University’s exempt purpose, and parking fees are not treated as rent from real property.

45. Sales Exempt Reportable Example Determination Example Determination
Sale of clothing and other items to the University community that are embossed with the University seal.
Bookstore or other on-campus sale of University logo items to members of the University community qualify under the convenience rule.
Sale of excess crops used in research. The crops are sold in an “as is” condition when mature.
Income derived from the sale of goods which result from the performance of an exempt function is not taxable if the product is sold in substantially the same state it was in upon completion of the exempt function.
Example
Determination
Sale of emblematic items (T-shirts, mugs, caps, pennants, etc.) to alumni and the general public. The sales are made by mail order on a regular basis.
The sale of emblematic items is not substantially related to the exempt purpose of the University. Moreover, these sales are not for the convenience of University members since alumni are considered members of the general public.

46. Tower Rentals Exempt Reportable Example Determination Example
Rental of space on campus building to a third-party for placement of cellular transmission equipment, i.e. University allows third party to place its tower on University real estate, (either ground or existing building).
Income is considered tax exempt rent from real property.
Payments for the use of excess radio frequency.
IRS Private Letter Ruling that these types of payments constitute a royalty, and therefore are nontaxable.
Example
Determination
Rental of antenna space on a tower owned by the University (permanently affixed to either the ground or an existing building).
The rental of antenna space on the tower is not eligible for the rental exclusion. Towers are treated as tangible personal property rather than real property.

47. Catering/Food Services
Exempt
Reportable
Example
Determination
Rental of several rooms and halls on campus to unrelated organization for meetings where a contracted outside company provides food and drink to these organizations at these meetings and events.
Rents from real property are excluded. In addition, no services are rendered beyond those usually provided in connection with the rental of space.
Food services that are not directly accessible from the street and patronage by the general public is not directly or indirectly solicited.
Use by students, faculty and staff is exempt from UBI as a convenience to them. Casual and intermittent use by members of the general public does not constitute a business activity regularly carried on in a commercial manner.
Example
Determination
Rental of various rooms and halls on campus to unrelated groups for meetings where the University’s food services division provides catering services for these meetings.
*Income from both
catering services and
rental of facilities
The real property exclusion is lost if services other than those customarily provided for the convenience of the lessee are provided.
Catering services to non-University customers.
Not related to the University’s exempt purpose.

48. Objectives Background & Basics of UBI UBI Exclusions
Potential UBI-Generating Activities
Applicable “Real Life” Examples
Tax Reform

49. Tax Reform Tax Cuts and Jobs Act (Public Law No. 115-97)
Passed December 22, 2017
Most provisions of the law became effective as of January 1, 2018
The new tax law imposes significant new tax liabilities for nonprofit/exempt organizations
No guidance has been issued by the US Treasury or the IRS to date

50. Tax Reform – New Code Section 512(a)(6)
Unrelated business taxable income separately computed for each trade or business activity
a.k.a. “basketing”
Nonprofits “with more than one unrelated trade or business” must compute their UBIT “separately with respect to each such trade or business.”
Statute does not define what constitutes an “unrelated trade or business”

51. Tax Reform – New Code Section 512(a)(6)
Raises more questions than it answers:
Advertising income from multiple sources
Rental of same room but for different private events
Facilities rented for summer sports camps and weddings
School store located on different campuses
Passive investing – how narrow will a Trade or Business be defined

52. Tax Reform – New Code Section 512(a)(7)
Unrelated business taxable income increased by amount of certain fringe benefit expenses for which deduction is disallowed
Imposes a 21% tax on expenses for certain employee fringe benefits
Transportation, parking and athletic facilities
Meant to ensure “parity” between for-profits and nonprofits in regard to qualified transportation benefits
Issue: Nonprofits never had a deduction for these expenses and never provided transportation benefits to gain a tax deduction

53. Tax Reform – New Code Section 512(a)(7)
Two options:
Continue to provide the transportation fringe benefit tax-free to its employees and pay the associated tax liability; or
Treat the benefit to employees as taxable compensation, subjecting the employees to income tax and half of employment taxes on such amounts, with the tax-exempt organization matching its half of payroll taxes

54. Tax Reform – New Code Section 512(a)(7)
Raises many questions:
Payments into pre-tax qualified plan
State or local law mandated pre-tax qualified plans for mass-transit
Employer owned building with set aside parking spaces for its employees
Employer leases a building and parking spaces for its employees are included in the lease

55. Questions

56. Contact
Andrea Newman, CPA James Moore & Co. Phone: (352)