Unrelated Business Incme (UBI) UNL is exempt frm incme tax under Sectin 501(c)(3) f the Internal Revenue Cde n incme frm activities that are substantially related t its educatinal and research missins, which frm the basis fr the University's tax exemptin. Hwever, if UNL were t carry n a trade r business activity that is nt substantially related t its exempt purpses, it wuld be subject t tax n the net incme f such a business activity, even thugh it may bring in funds t supprt UNL's exempt peratins. UBI Defined Unrelated Business Incme is the incme frm a trade r business activity that is regularly carried n by an exempt rganizatin and that is nt substantially related t the perfrmance by the rganizatin f its exempt purpse r functin, except that the rganizatin uses the prfits derived frm this activity. Thus, fr UBI t ccur, three requirements must be met: (1) a trade r business activity, (2) which is regularly carried n, and (3) is nt substantially related t the taxexempt purpse f the University. Each ne f these requirements is briefly described belw. Trade r Business The term "trade r business" generally includes any activity carried n fr the prductin f incme frm selling gds r perfrming services. An activity des nt lse its identity as a trade r business merely because it is carried n within a larger grup f similar activities that may, r may nt, be related t the exempt purpses f the rganizatin. Regularly Carried On Business activities rdinarily are cnsidered regularly carried n if they shw a frequency and cntinuity, and are pursued in a manner similar t cmparable cmmercial rganizatins. Substantially Related t Exempt Purpse A business activity is nt substantially related t an rganizatin's exempt purpse if it des nt cntribute imprtantly t accmplishing that purpse (ther than thrugh the prductin f funds). Whether an activity cntributes imprtantly depends in each case n the facts invlved. In determining whether activities cntribute imprtantly t the accmplishment f an exempt purpse, the size and extent f the activities invlved must be cnsidered in relatin t the nature and extent f the exempt functin that they intend t serve. T the extent an activity is cnducted n a scale larger than is reasnably necessary t perfrm an exempt purpse, it des nt cntribute imprtantly t the accmplishment f the exempt purpse. That part in excess f what is needed t accmplish the exempt purpse wuld be cnsidered an unrelated trade r business. Excluded Trade r Business Activities The fllwing activities are specifically excluded frm the definitin f unrelated trade r business:
Vlunteer wrkfrce Any trade r business in which substantially all the wrk is perfrmed fr the rganizatin withut cmpensatin is nt an unrelated trade r business. Activities fr the Cnvenience f the University A trade r business carried n by a university primarily fr the cnvenience f its members, students, patients, fficers and emplyees is cnsidered a related trade r business. Qualified Spnsrship Payments 1. Sliciting and receiving qualified spnsrship payments (QSP) is nt an unrelated trade r business and such payments are nt cnsidered unrelated business incme. A QSP is any payment made by a persn engaged in a trade r business fr which the persn will receive n substantial benefit ther than the use r acknwledgement f the business name, lg, r prduct lines in cnnectin with the rganizatins activities. "Use r acknwledgement" des nt include advertising f the spnsr's prducts and services. Organizers f an annual student picnic receive a payment frm a lcal car dealership in exchange fr inclusin f the dealer's lg n a sign at the entry f the picnic grunds. The payment is a QSP and is nt subject t unrelated business incme tax. 2. Prviding facilities, services, cmplimentary tickets r ther privileges t the spnsr in cnnectin with a QSP des nt affect whether the payment is a QSP. Instead the prvisin f such privileges is treated as a separate transactin in determining whether the university wuld have unrelated business incme frm the payment. If such additinal privileges are nt f substantial benefit, the payment will nt be subject t tax. 3. A payment is nt a qualified spnsrship payment if, in return, the rganizatin advertises the spnsr's prducts r services. Advertising includes: Messages cntaining qualitative r cmparative language, price infrmatin r ther indicatins f savings r value Endrsements Inducements t purchase, sell r use the prducts r services. 4. The use f prmtinal lgs r slgans that are an established part f the spnsr's identity is nt, by itself, advertising. Mere distributin r display f a spnsr's prduct by an university t the public at a spnsred event, whether free r fr remuneratin, is cnsidered use fr acknwledgement f the prduct rather than advertising. The rganizers f the picnic described abve have put tgether a cmmemrative prgram fr the event. In exchange fr the dealer's spnsrship payment, the dealer is able t place a full clr advertisement in the prgram and display an autmbile n the picnic grunds in additin t placing its lg n the sign at the entry t the picnic grunds. In this case, the value f the advertisement wuld be cnsidered unrelated business incme and the value f the lg placement and the right t display wuld be exempt.
5. A payment is nt a QSP if its amunt is cntingent upn the level f attendance at the event, bradcast ratings, r ther factrs indicating the degree f public expsure t the event. 6. The selling f dnated merchandise is nt an unrelated trade r business. Unrelated Business Incme (UBI) Exclusins frm Unrelated Business Incme Treasure Market is an auctin f items dnated t an auxiliary in supprt f the Art Department. The prceeds frm the sale f the items dnated are nt unrelated business incme. The fllwing types f incme are generally excluded when figuring unrelated business incme. Hwever, the exclusins d nt necessarily apply t incme frm debt-financed assets (described belw): 1. All dividends, interest, annuities, payments with respect t securities, lans, and incme frm ntinal principal cntracts. 2. Payments received with respect t a securities lan are excluded frm unrelated business incme nly if the lan is made under an agreement that: Prvides fr the return t the rganizatin f securities identical t thse laned; Requires payments f amunts equivalent t all interest, dividends and ther distributins that the wner f the securities is entitled t during the perid f the lan; Des nt reduce the rganizatin's risk f lss r pprtunity t gain n the securities; Cntains reasnable prcedures t adequately "cllateralize" the securities lan at daily fair market value, and Permits the rganizatin t terminate the lan upn ntice f nt mre than five business days. 3. Payments with respect t securities lans include dividends and interest frm the underlying securities, incme frm the cllateral security r investment theref, r fees based upn the perid f time the securities are n lan. 4. Ryalties, including verriding ryalties, are excluded frm unrelated business incme. A ryalty is a payment relating t the use f a valuable right, including trademarks, trade names r cpyrights. Ryalties d nt include payment fr persnal services EXAMPLES: Ace Sprtswear, an independent fr prfit peratr f sprts clthing business, pays a university a fixed percentage f its sales f its sprtswear line, which features the university's lg. The university is exempt frm tax n the ryalty incme derived frm this arrangement.
Mercury, an upstart in sprts apparel, arranges the same deal as Ace. Als included are persnal appearances by several f the university caches at the unveiling f the prduct line. The caches als have cmmitted (in whle r in part) t endrse the apparel line. The inclusin f persnal services in the ryalty arrangement causes the lss f the ryalty incme tax exclusin. Unrelated business incme des nt include ryalty incme frm licensees f patents wned by a university that were assigned t it by inventrs fr specific percentages f future ryalties. 5. Rents frm real prperty are generally excluded frm unrelated business incme. Rents frm persnal prperty are nt excluded. In the event f a mix f persnal and real prperty, the entire lease is exempt if the prtin due t persnal prperty is less than 10%. If the prtin is between 10% and 50% persnal prperty, then nly the prtin attributable t the real prperty is exempt. If the prtin f persnal prperty exceeds 50%, the entire lease is subject t tax. The rental exclusin des nt apply t leases based upn a percentage f the prfit earned by the tenant. T be exempt, a lease must be either a fixed amunt f rent r a percentage f sales r a cmbinatin theref. EXAMPLES: A university rents retail space t vendrs in a building wned by the university. The tenants pay the university a guaranteed mnthly rent and additinal rent shuld their sales exceed agreed upn levels. The rent s derived is excluded frm taxable incme. Venture, an exciting new restaurant, prpses t cmpensate the university by ffering 25% f its prfits in exchange fr a space in the building. Prceeds t the university frm such an arrangement are unrelated business incme. The rental exclusin des nt apply when persnal services are als rendered t the tenant. In additin, the exclusin des nt apply t rental f htel rms, rms in barding huses r turist hmes, r spaces in parking lts r warehuses. A university cntemplates building and perating a full service htel n campus t huse visiting schlars, parents, visiting athletic teams and guests. The peratin f the htel is an unrelated business activity. 6. Incme frm research at a university is exempt, whether fundamental r applied. The term research des nt include activities f the type nrmally carried n incident t cmmercial r industrial peratins, such as testing r inspecting materials r prducts, r designing r cnstructing equipment. 7. Gains r lsses frm the sale, exchange r ther dispsitin f prperty are exempt frm unrelated business incme ther than: Stck in trade r ther prperty f a kind that wuld prperly be included in inventry; Prperty held primarily fr sale t custmers in the rdinary curse f a trade r business, r
Cutting f timber that an rganizatin has elected t cnsider as a sale f timber. 8. Any gain frm the lapse r terminatin f ptins t buy r sell securities is excluded frm unrelated business incme, but nly if written in the curse f the rganizatin's investment activities. Other Surces f Unrelated Business Incme 1. A university may have unrelated business incme as a member f a partnership. If s, it must include its share f the taxable incme f the partnership as thugh it had perated the business itself. 2. The share f any incme f an "S" crpratin will be taxable regardless f the actual surce r nature f the incme. A university's share f any interest r dividend incme (therwise exempt) frm an "S" crpratin will be subject t tax. 3. Interest, annuities, ryalties and rents frm a cntrlled taxable crpratin are subject t tax, if thse items reduced the tax f the cntrlled crpratin. T be cntrlled, the exempt rganizatin must wn mre than 50% f the stck in a crpratin r mre than a 50% interest in a partnership. The Eatery is a whlly wned, taxable subsidiary crpratin f a university. The Eatery has a taxable incme f $150,000 and pays all necessary taxes. It has taken a deductin f $25,000 fr the rent that it pays t the university. The $25,000 rent amunt is unrelated business incme t the university. 4. Investment incme that wuld therwise be excluded frm tax must be included t the extent it is derived frm debt-financed prperty. The term debt-financed prperty means any prperty held t prduce incme (including gain n sale) fr which there is an acquisitin indebtedness at any time during the tax year r during the 12-mnth perid prir t the prperty's dispsal. Prperty includes real estate, tangible persnal prperty and crprate stck. 5. Acquisitin indebtedness is the unpaid amunt f debt incurred by the rganizatin: When acquiring r imprving prperty Befre acquiring r imprving prperty if the debt wuld nt have been incurred except fr the acquisitin r imprvement After acquiring r imprving prperty if the debt wuld nt have been incurred except fr the acquisitin r was reasnably freseeable when the prperty was acquired r imprved. 6. Real prperty debts f an educatinal institutin are generally exempt frm the acquisitin indebtedness rules. If substantially all (85% r mre) f the use f any prperty is substantially related t the rganizatin's exempt purpses, the prperty is nt treated as debt-financed prperty. Related use des nt include the generatin f incme. If an rganizatin acquires real prperty with the intentin f using the land fr exempt purpses within 10 years, it will nt be treated as debt-financed prperty if it is in the neighbrhd f ther prperty the rganizatin uses fr exempt purpses. Neighbrhd prperty is that which is cntiguus t the wned prperty r within ne mile if it is nt practical t acquire cntiguus prperty.
After 5 years, the rganizatin must satisfy the IRS that exempt use will ccur with the next 5 years.