Unrelated Business Income Tax (UBIT)
The University of Minnesota is exempt from federal and state income tax as an integral part of the State of Minnesota. However, revenue-generating activities not directly related to the University of Minnesota’s exempt purposes of research and discovery, teaching and learning, and outreach and public service may be subject to federal unrelated business income tax (UBIT). Congress imposed UBIT on exempt organizations to eliminate a source of unfair competition by placing tax-exempt organizations on the same basis as nonexempt organizations with which they compete. When a revenue-generating activity is a trade or business, regularly carried on, that is not related to the University’s mission, it may result in UBIT.
Internal Revenue Service Regulations go into great detail in defining these concepts. For UBIT purposes, trade or business generally means any activity that is carried on for the production of income from the sale of goods or the performance of services. We consider whether the University intends to make a profit from an activity when determining whether it is a trade or business. The frequency and continuity of the activity and the manner in which it is pursued are considered in determining whether it is regularly carried on. Often the most difficult determination is whether the activity is related to the University’s exempt mission.
Numerous Private Letter Rulings have been issued by the IRS providing guidance on when an activity is unrelated to a particular exempt purpose. There are also numerous statutory exceptions for particular activities and exclusions for certain income.
New activities that go through the external sales application process are reviewed by the Tax Management Office to determine whether the activities are included in the University’s UBIT reporting. UBIT determinations are very dependent on the facts and circumstances of each activity.
UBI Working Tips
- Activities with University departments are not UBI.
- University sponsored activities are not UBI.
- Agreements with external taxable entities may result in UBI and all agreements should be reviewed
by the Tax Management Office.
- Third party catering/cafe agreements may result in UBI and all agreements should be reviewed by the Tax Management Office at the time the contract is being developed.
- Unrelated Business Income Tax Procedures, and Collecting and Remitting Minnesota Sales Tax on External Sales Transactions (UofM Policy)