FPM 5.4 Unrelated Business Income Tax

Identifying Unrelated Business Income

1. If a department is providing sales or service to external customers on a regular basis as a trade or business, a UBIT Questionnaire is to be completed and submitted to Tax Services at FNSV-Tax-Services@arizona.edu. Tax Services may also request a UBIT Questionnaire for activities discovered on independent review. When completing the questionnaire, departments should include the contact information of the individual with the most knowledge of the activity.
2. Additional facts and circumstances may be needed to make an appropriate determination, and all information is to be submitted in writing. Further guidance to include flowcharts and determinations for specific activities are located on the Tax Services UBIT webpage.
3. To determine if an activity is subject to UBIT, the following expanded definitions are to be taken into consideration. An activity is subject to UBIT only if it is a trade or business, regularly carried on, and not substantially related to the exempt purposes of the University.
   1. The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. An activity must be conducted with intent to profit to constitute a trade or business.
      1. Business conducted in a competitive manner is considered strong evidence of intent to profit.
      2. Where an activity carried on for profit is an unrelated trade or business, the trade or business is not excluded merely because it does not result in profit.
      3. Sustained, significant, and repeated losses generated by unrelated activities may not be considered trade or business for lack of profit motive.
      4. If the University charges substantially below the cost of its goods or services, then the activity is not a trade or business, and the losses are not allowed to offset net UBI from profitable unrelated business activity.
   2. Business activities are considered “regularly carried on” if they show frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.
      1. An activity should not be considered regularly carried on if it is on a very infrequent or one-time basis.
      2. Activities over a period of only a few weeks or days are not "regular" for the University if the same kind of activity is normally conducted by a nonexempt business on a year-round basis.
      3. Year-round activities are regular even if they are conducted only one day a week.
      4. Seasonal activities may be considered regularly carried on, even though they are conducted only for a short period each year.
   3. A business activity is “not substantially related” to the University’s exempt purpose if it does not contribute importantly to accomplishing that purpose other than through the production of funds. Whether an activity contributes importantly depends in each case on the facts involved. To establish whether or not activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. This list of determination factors is not exhaustive.
      1. The size and extent of the activities must be considered in relation to the nature and extent of the exempt function that they intend to serve. If 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 needed to accomplish the exempt purpose is an unrelated trade or business.
      2. Dual 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 (see FAQ for example – Dual use).
      3. Selling products of exempt functions (see FAQ for example – Product of exempt function).
4. Exclusions - The following activities are specifically excluded from the definition of unrelated trade or business:
   1. Activities provided by a volunteer workforce - Any trade or business in which substantially all of the work (more than 85%) is performed without compensation is not unrelated trade or business.  In assessing the contribution made by volunteers, the IRS considers factors such as the monetary value of the respective service rendered, the number of hours worked, the intrinsic importance of the volunteer work performed, and the degree of reliance placed upon volunteers.
   2. Activities provided for the convenience of members - Any activity carried on primarily for the convenience of University members, such as students, faculty or staff is not unrelated trade or business.
   3. Income generated by selling donated merchandise - A trade or business that consists of selling merchandise, substantially all (more than 85%) of which the University received as gifts or contributions, is not an unrelated trade or business.
   4. Qualified sponsorship payments - Any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the University’s activities is considered a qualified sponsorship payment. “Use or acknowledgment” does not include advertising the sponsor's products or services.
5. Exceptions - The following activities are generally exempt from UBI:
   1. Dividends, interest, annuities and other investment income,
   2. Royalty income,
   3. Rents from real property (rents from personal property are potentially subject to UBIT),
   4. Gains or losses from disposition of property.

Reporting Unrelated Business Income

6. For departments with activities determined to be UBI, the department is responsible for providing the fiscal year’s UBI and associated expenses to Tax Services on or before the last business day of August, annually.
   1. UBI and associated expenses are to be submitted to Tax Services along with the program’s total income and expense. Supporting financial documentation to consist of Analytics reports, worksheets and any other relative information are to be included.
      1. Direct costs that can be apportioned to UBI are deductible; those that cannot be apportioned directly will be reasonably allocated by Tax Services as defined and accepted under IRS guidance.
   2. With the submission of annual UBI and associated expenses, the department is also responsible for submitting an estimate of program total income and UBI and associated expense for the following fiscal year.
   3. When completing reports each year, departments should include the contact information of the individual with the most knowledge of the reports.
   4. It is the department’s responsibility to ensure any related UBIT liability can be covered by the appropriate department account.
7. Tax Services is responsible for making an appropriate estimated payment of UBIT for the fiscal year in progress on or before October 15, annually.
   1. Tax Services receives the departments’ reports providing estimated program total income and expense and estimated UBI activity income and expense on or before the last business day of August, annually.
   2. If additional information is needed to clarify estimated income or expense, Tax Services will request detail as necessary to be submitted in writing.
   3. Tax Services combines the estimates of all departments and makes payment to the US Treasury based on anticipated UBIT liability.
8. Tax Services is responsible for the preparation and submission of US Treasury Form 990-T, associated schedules, and any related payment on or before November 15, annually.
   1. Tax Services receives the departments’ reports providing program total income and expense as well as UBI activity income and expense on or before the last business day of August, annually.
   2. If additional information is needed to clarify income or expense, Tax Services will request detail as necessary to be submitted in writing.
   3. Tax Services will obtain the necessary data if a space allocation is to be applied to indirect expenses.
   4. Tax Services compiles the financial data of departments with UBI activity, and prepares Form 990-T and associated schedules for submission to the IRS, with payment if applicable.

Paying Unrelated Business Income Tax

9. Each department with UBI profit will be allocated a charge of actual UBIT by Tax Services via a Disbursement Voucher on or before November 30, annually.