What is UBI?
- Even a tax-exempt educational organization such as USC is taxed on its unrelated business taxable income (UBI)
- There are two types of unrelated business taxable income:
- Income arising from the conduct of unrelated trade or business that is regularly carried on.
- Debt-financed income, which is usually in the form of rent, interest or royalties arising from financed property.
How do I determine if I am subject to UBI?
- Unrelated Business Income consists of income generated by the University from activities that are not related to the exempt mission of the University. Income from an activity is considered unrelated if all of the conditions listed below are met:
1.) The activity is conducted as a trade or business
What is a trade or business?
- It is any activity carried on to produce income from the sale of goods or performance of services
- Generally we look at:
- whether the activity generates a profit
- whether it is conducted in the same manner as a for-profit business that provides a similar good or service
- Some UBI-generating activities show profits in some years and losses in others, so an activity does not always have to generate a profit in order to be considered UBI
2.) Regularly carried on
What does it mean to be regularly carried on?
- It means that the exempt organization conducts the activity with the same frequency and continuity, and in a similar manner to, comparable commercial activities of nonexempt organizations.
3.) Not substantially related to the exempt mission of the University
How is an activity characterized as not being substantially related to USC exempt purpose?
- USC exempt purposes are education and research, so an activity whose purpose is not substantially related to one of those purposes would be characterized as unrelated. It is irrelevant that the proceeds from an activity are used to fund education or research. The determining factor is the nature of the activity itself.