IRS to Launch UBIT Project Aimed at Colleges and Universities
(June 15, 2007)
The IRS is developing a project to review the practices of Colleges and Universities as it relates to unrelated business taxable income and expense allocation.
Each year, the IRS publishes its Exempt Organization Implementing Guidelines which provide some insight into the projects and activities in which the IRS expects to focus in the upcoming year. In November 2006, the IRS released its 2007 Implementing Guidelines indicating its intention to focus upon several key areas many of which either directly or indirectly target the college and university sector.
Critical Initiatives
New Projects
Political Activities
Gaming
Credit Counseling
Employment Taxes
Executive Comp.
Telephone Excise Tax
Tax Exempt Hospitals
Supporting Organizations
Down Payment Assistance
College and University UBIT Project
In 2008, the IRS plans to roll out a project to review the treatment and allocation of income and expenses in the college and university area. Colleges and Universities have less than a year to determine if their activities are in compliance with applicable law.
Unrelated Business Income Tax Rules
The Internal Revenue Code defines the term “unrelated business taxable income” as the gross income derived by an organization from any unrelated trade or business regularly carried on by it, less certain allowable deductions and modifications. Unrelated Business Income is defined as income from a trade or business that is regularly carried on by an exempt organization and that is not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. Treasury Regulations allow tax exempt organizations deductions that are “directly connected with the carrying on” of unrelated trade or business.
In many instances, the rules regarding whether an activity constitutes unrelated business income is inherently grey and the filing threshold is extremely low. Where an organization finds that it has $1,000 or more of gross income from unrelated activity, the IRS requires that the organization file a Form 990-T, Exempt Organization Business Income Tax Return. It is important to note that the UBIT rules and the Form 990-T filing requirement also apply to state universities that are otherwise exempt from filing a Form 990.
Common activities conducted by Colleges and Universities that often give rise to unrelated business income tax include:
- Certain bookstore sales
- Summer camps
- Summer conferencing
- Real property rental
- Corporate sponsorships
- Athletic events
- Rental of facilities to general public
- Advertising
Protect Your Organization from Exposure
Parente Randolph can help you develop a compliance program for your organization. We have performed studies for a number of colleges and universities and can identify where the most significant level of exposure exists and provide strategies to limit and mitigate your exposure to tax. Specifically, our assistance would include:
- Identifying commercial activities that could be considered unrelated to the organization’s exempt purpose. Our analysis in these areas could be used as a template by other University departments on an annual basis for identifying, quantifying, documenting, and reporting unrelated business activities in the future.
- Providing an opinion letter on the appropriate tax treatment of various campus activities.
- Assistance with development of expense allocation methodologies.
- Developing workshops to educate various departments on the rules and their responsibilities with regard to UBIT compliance.
- Preparing the Form 990-T where deemed necessary.
- Developing policies and procedures for continued compliance.
For more information, please contact Julius Green via phone (215.972.2352) or email (jgreen@parentenet.com).
