Unrelated business income tax

Purpose

The purpose of this policy is to comply with applicable IRS regulations and to inform college departments of procedures/guidelines to identify unrelated business activities and then report the revenues and associated expenses generated by such activities.

Policy

It is the policy of Lynn University that all unrelated business income be accurately reported on the University’s federal tax return each year in accordance with IRS rules and regulations. To support this reporting, it is essential that any potential sources of unrelated business income be reported to the Business Office for determination of whether or not unrelated business income exists. It is the responsibility of the department heads to ensure that unrelated business income is tracked within their departments in a manner that facilitates the required reporting to the IRS.

Definitions

Gross Income—gross receipts less cost of goods sold or reserves provided.

Unrelated Business Income (UBI)—income from a regularly carried on activity that is not substantially related to the exempt purpose of the University (e.g. not educationally or research based) is classified as unrelated.

Unrelated Business Income Tax (UBIT)—for an activity to be subject to UBIT, it must meet all of the following criteria: (a) it must be a trade or business for the production of income from selling goods or performing service, (b) the trade or business must be regularly carried on, and (c) it must not be substantially related to the carrying out of the University’s exempt purpose. An activity is not taxable if one or more of these conditions is absent. When an activity meets all three criteria, several exceptions found in the Internal Revenue Code must be reviewed to determine whether the activity may be excluded from the IRS Form 990-T filed annually by the University.

Procedures/Guidelines

Any department that has reason to believe that any existing or new activity may potentially generate UBI must contact the Office of Business and Finance to discuss the specific facts surrounding that activity. In consultation with University’s independent tax consultants or General Counsel, a determination will be made regarding whether UBI exists.

If it is determined that UBI exists, the Office of Business and Finance will keep an accounting of the income associated with it.

The Office of Business and Finance will determine all direct and indirect expenses associated with an activity that may produce UBI. This will include an allocation of certain general and administrative expenses to the activity where applicable.

The Office of Business and Finance Office will keep a summary statement of UBI activity and will periodically review this summary with the external auditors to determine if the activity is reportable on the 990-T tax return.

A. Guidelines to Determine the Existence of UBI

The following guidelines will be used to determine the existence of UBI:

1. The use of revenue generated from the activity for the purpose of improving the quality of instruction or activity that is in line with the educational mission makes no difference on reporting requirements. It is the source of income that determines the UBI status.

2. The Office of Business and Finance will exclude the following activities from reporting as unrelated business income. Any activity that: (a) exists primarily for the convenience of Lynn University students or employees; (b) is infrequent, i.e., the activity is not regularly scheduled and infrequently carried on; (c) is substantially related to the University’s exempt purpose provided the activity is not carried on to an extent greater than necessary; (d) is not a “trade or business;” (e) has 85% or more of the income from the activity generated from the sale of donated goods; (f) is derived from labor which is at least 85% volunteer.

II. Basic Exclusions and Exemptions from UBI

1. Convenience: Income from an unrelated trade or business that is carried on primarily for the convenience of students or employees is not taxable.

2. Investment Income: Dividends, interest, capital gains and other income received from the holding of the University’s investments are generally not taxable.

3. Royalties: A royalty is passive income received from entities external to the University for the use of University property or rights. Royalty income is not taxable.

4. Real Property Rents: Rents from real property (buildings, apartments, commercial space) are not taxable. However, if the rent includes compensation for services rendered to the tenant, the income may be taxable.

5. Personal Property Rents: Although rents from personal property (furniture, household appliances) are generally taxable, such rents may be non-taxable if they are an incidental amount (less than 10%) of the total rents received under a lease for real property.

6. Research Funding: The funding for any research conducted in any college, department, division, or center within the University is not taxable.

To learn more about this policy or the supporting procedures, please contact Finance.

Policy updated on: Oct. 24, 2018