Unrelated Business Income Tax Details

I.  Purpose:

Central Michigan University (CMU) reports taxable Unrelated Business Income (UBI) as required by the Internal Revenue Service Code and Regulations. The University requires every operating unit to comply with the Internal Revenue Service Code and Regulations concerning taxable Unrelated Business Income. This policy provides a summary of information on income taxable to CMU. If you have any questions or need more information, please contact Accounting Services at 774-3707.

A. Applicability

CMU is exempt from the payment of income taxes on income related to its exempt purposes. However, the University is liable for taxes on unrelated business income (UBI). Income from an activity carried on by an exempt organization is subject to the unrelated business income tax if the following three criteria are present:

1. The activity constitutes a “ trade or business,”

2. The activity is “ regularly carried on” by the organization, and

3. The conduct of the activity is “ not substantially related” (other than through the production of funds) to the performance of the organization’s exempt function.

The Internal Revenue Service anticipates that exempt organizations will engage in activities that may be in competition with private business endeavors. To be nontaxable, the activities must be substantially related to the purpose for which the organization has an exemption status. Therefore, the University derives taxable income from an activity if that activity is not related to its educational, scientific, literary, charitable and patient care purposes.

B. Definitions of unrelated business taxable income (UBTI)

1. Background

  • Unrelated business taxable income is defined in Internal Revenue Code Section 512(a)(1) as “gross income derived by any organization from any unrelated trade or business (as defined in Section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b).”
  • Section 512(b) includes a number of types of income that are excluded from UBTI, the most notable of which are: (1) dividends, (2) interest, (3) royalties, (4) rents from real property, (5) capital gains and losses, and (6) income from research.

2. “Trade or business” – The term “trade or business” includes any activity carried on for the production of income from the sale of goods or performance of services. The activity must be conducted in a manner similar to the style which a for-profit business would operate.

  • For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose.
  • Soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization’s periodical that contains editorial matter related to the organization’s exempt purpose.

3. “Regularly carried on” – Whether that trade or business is “regularly carried on” depends on the frequency and continuity with which the activities are conducted and the manner in which they are pursued.

  • For example, a hospital auxiliary’s operation of a sandwich stand for four days at an art fair would not be the regular conduct of a trade or business. The stand would not compete with similar taxpaying facilities that normally operate year-round.
  • However the same auxiliary running a parking lot for the general public every Saturday twelve months a year would be a trade or business conducted on a regular basis. This activity would result in Unrelated Business Income.

The U.S. Court of Appeals has stated that the NCAA did not “regularly carry on” the trade of advertising in its programs for the NCAA Basketball Tournament. The NCAA sold programs for approximately three weeks during its annual basketball tournament. The court said the NCAA could not be considered in competition with non-exempt commercial activities that operated twelve months a year. If the activity is “of a kind normally conducted by nonexempt commercial organizations on a year-round basis, the conduct of such an activity by an exempt organization over a period of only a few weeks does not constitute the regular carrying on of trade or business.” The sales income was declared to be UBI, however the income was not taxable because the activity was not “regularly carried on.”

4. “Substantially related” – The trade or business activity must contribute importantly to the accomplishment of the organization’s exempt purpose to be “substantially related” to the organization’s tax-exempt purposes. To determine whether or not a business activity is substantially related requires an examination of the relationship between the business activities and the organization’s primary exempt purpose. An activity is related to an exempt purpose only when the conduct of business activity has a casual relationship to the achievement of exempt purposes. The casual relationship must be substantial.

  • For example, patient fees for work done at the dental school by students are clearly related to the exempt purpose of education, as are Executive Education fees for the Business School and are ticket sales to the general public for athletic events.
  • An exempt organization engaged in rehabilitating handicapped persons (its exempt function) can sell articles made by these persons as part of their rehabilitation training and the sales would not result in an unrelated trade or business.

C. Basic exclusions and exemptions from unrelated business income

1. Convenience: Income from an unrelated trade or business which is carried on primarily for the convenience of its students, faculty, staff, patients and alumni is not taxable.

  • For example, a college operates “a laundry service” for the purpose of laundering dormitory linens and students’ clothing. This revenue is not taxable as unrelated business income because the activity is for the convenience of the students.

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

3. Royalties: A royalty is passive income for the use of property or rights, usually paid as a percentage of receipts from using the property or as a fixed amount per unit produced and is not taxable.

4. Real Property Rents: Rents from real property (buildings, apartments, commercial space) are not taxable. If real property is rented with services, the income may be taxable.

5. Personal Property Rents: Rents from personal property (furniture, household appliances) are taxable. If the rents for personal property are an incidental amount (less than 10%) of the total rents received under a lease for real property, they are not taxable.

6. Percentage Rents: Rents based on a fixed percentage of gross revenue are not taxable. Percentage rents based on net income are taxable, even if for real property or incidental personal property.

7. Sale of Assets: Gains or losses from the sale, exchange or other disposition of property, other than inventory, stock in trade and property held primarily for sale to customers are not taxable.

8. Government Research Funding: The funding for research conducted for the United States, its instrumentalities or agencies, or any State or political subdivision is not taxable.

9. College and University Research Funding: The funding for any research conducted for any entity by a college, university or hospital is not taxable.

10. Volunteer Labor: Income derived from an unrelated trade or business, in which substantially all the work of the trade or business is provided on a volunteer basis is not taxable.

  • A university department conducts weekly public dances. If the work at the dances is performed by unpaid volunteers, the income from the dances is not taxable as unrelated business income. However, if the same department holds weekly public dances for a fee, and uses hourly workers to staff the dances, the income is taxable.

11. Donated Property: Income from the sale of merchandise, substantially all of which has been donated by gift or contribution, is not taxable .

  • A hospital auxiliary operates a thrift shop that sells donated clothes and books to the general public. If the proceeds go to the exempt organization, the income is not taxable.

12. Qualified sponsorship activities: Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax .

13. Qualified sponsorship payment: This is 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 organization’s activities. “If use or acknowledgment” does not include advertising the sponsor’s support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax.

D. Deductions and Expenses and Dual Use of Facilities

Unrelated business revenue may be reduced by allowable donations to arrive at taxable income. All expenses used to arrive at unrelated business taxable income must otherwise qualify as allowable income tax deductions; that is, they must be normal and reasonable expenses. In most cases where unrelated income is present, facilities and personnel are used to conduct both exempt and non-exempt activities. Expenses attributable to both activities must be allocated between the two uses on a “regular basis.” The revenue producing department must maintain adequate records to support the allocation of expenses claimed as deductions. Full and complete documentation is very important and must be retained.

  • Examples of normal and reasonable expenses are salaries, fringe benefits, supplies, utilities, chemicals, rent, and depreciation. Department and University overhead are also normal and reasonable expenses, as long as they are allocated on a reasonable basis.

The University will most often have related and unrelated use of assets and personnel when Unrelated Business Income is present. As stated above, a reasonable method of allocation must be used and documented to apportion the deductible expenses.

  • As an example, the University operates a golf course for use by its varsity teams, students, faculty and alumni (related). It also allows members of the general public to play the course (unrelated). The revenue received from the operation of the golf course is both related and unrelated. The University therefore has a dual-use of facilities and personnel. It must allocate the total expense on a reasonable basis. For golf course, using the ratios of related and unrelated rounds played to total rounds played is a reasonable method of allocating direct expenses. It takes no more or less expense to support a related round of golf than it does to support an unrelated round.

In a case between the IRS and Rensselaer Polytechnic Institute, the U.S. Court of Appeals stated that a reasonable allocation method was time the facility was used for unrelated activities to total the facility was used (the facility was closed for part of the year.) The IRS claimed that expenses should be allocated only on a basis of time used for unrelated activities to total time available, i.e. the whole year. If the IRS had prevailed the deduction for fixed expenses would have been less.

E. Examples of University activities that may generate Unrelated Business Income are:

In general, any revenue from a non-university source has the potential to become UBI and taxable.

1. Alumni Association Travel Tours

A tax exempt university alumni association provides a travel tour program for its members and their families. The organization provides an employee for each tour as a tour leader. There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. By providing travel tours to its members, the organization is engaging in a regularly carried on trade or business.

2. Computer Laboratory

An exempt university has excess computer capacity and sells this available time to outside customers. It regularly provides computer time, programs and other services to the general public. These activities constitute a trade or business. The revenue is UBI and taxable.

3. Special Events (rock concerts, etc.)

A tax-exempt museum may have an auditorium that is designed and equipped for education in the arts and sciences. The theater is a principal feature of the museum and is in continuous operation during the hours the museum is open to the public. If the museum were to operate the theater as a motion picture theater for public entertainment during the evening hours when the museum is otherwise closed, gross income from that operation would be gross income from the conduct of an unrelated business.

4. Renting Personal Property

Rents from personal property are taxable. See mixed leases for additional information.

5. Indoor Tennis Facility

An exempt university has tennis courts and dressing rooms that it uses during the school year in its educational program. The school also regularly allows the general public to use the same tennis facilities for a fee. School employees schedule, maintain, and staff the courts at all times. Duties include collecting membership fees and maintaining the facilities. Furnishing tennis facilities to the general public does not further the university’s exempt purpose and is a trade or business that is regularly carried on. The revenue is UBI and taxable.

An exempt university operates a driving range. The range is used by the university golf team as well as its students, staff, and alumni. The range is open to the general public. The range is managed and staffed by University employees and is operated similarly to commercial ranges. The fees charged are comparable to fees of commercial facilities and are designed to return a profit. The operation of the driving range in a commercial manner does not contribute importantly to the accomplishment of the organization’s exempt purpose. It therefore carries on an unrelated trade or business. The revenue is UBI and taxable.

  • If the revenue from students, faculty, staff and alumni were segregated, that portion of total revenue would be related and not taxable (due to the convenience exception).

6. Summer Camps

A college that made available its facilities and personnel to an individual not associated with the institute for the conduct of a summer tennis camp was ruled to be engaged in the conduct of an unrelated business.

7. Bookstore

Sales of items to the general public, as opposed to students and faculty, can be unrelated business activity.

8. Advertising vs. Corporate Sponsorships

An exempt university receives advertising revenue from a number of vendors, primarily in relation to athletics. The revenues are unrelated to the exempt function of the university. The income is UBI and taxable.

Sponsorship income is not equivalent to advertising income. A sponsor may receive recognition but it may not receive advertising. “CMU is proud to have XXX as our sponsors” is a statement of recognition. “CMU suggests you buy from XXX” is advertising. There are very specific rules to distinguish between sponsorship revenue and advertising revenue.

Advertising revenue (taxable) includes:

  • Messages containing qualitative or comparative language, price information, or other indications of savings or value.
  • Endorsements
  • Inducements to purchase, sell, or use the products or services.

The use of promotional logos or slogans that are an established part of the sponsor’s identity is not, by itself, advertising. In addition, mere distribution or display of a sponsor’s product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising.

9. Other Services

An exempt university hospital provides laundry service to a non-hospital laundry using its excess capacity. The unrelated revenue is UBI and taxable.

A mailing service operated by a tax-exempt organization was ruled to be an unrelated trade or business even though the mailing equipment also was used for exempt purposes.

10. Membership Lists

An exempt educational organization regularly sells membership mailing lists to business firms. This activity does not contribute importantly to the accomplishment of the organization’s exempt purpose and therefore is an unrelated trade or business.

11. Mixed Leases

In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable.

12. Services Provided with Lease

An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. Under the lease agreement, the university furnishes heat, light and water and is responsible for all ground maintenance. It also provides dressing room, linen, and stadium security services for the professional team.

Leasing of the stadium is an unrelated trade or business. In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. Therefore, the income from this lease is rent from real property and unrelated business taxable income.

13. Teaching/Research

An exempt educational hospital provides certain laboratory testing on nonpatient specimens needed for the conduct of its teaching activities. This activity is a part of its exempt function (education and research); therefore, the revenue is not taxable . The relationship to teaching and research must be documented and retained. If the nonpatient specimens were not needed for teaching and/or research, the revenue generated would be UBI taxable.

14. Catering/Food Service

An exempt educational institution has excess capacity in its food service program. The food service unit provided catering services to both University and non-University users.

Catering services provided to University units, student, faculty, staff, and alumni is related and not taxable. Catering services to non-University customers constitute Unrelated Business Income and is taxable.

F. Examples of Activities That Do Not Generate Unrelated Business Income (UBI)

1. Part of an Exempt Function

An exempt hospital whose primary activity is rehabilitation receives revenue from the sale of hearing aids to patients. This activity is part of its exempt function and is not taxable.

2. Related Activities

An exempt hospital operates 1) a gift shop patronized by patients, visitors making purchases for patients, and employees; 2) a cafeteria and coffee shop primarily for employees and medical staff; and 3) a parking lot for patients and visitors only. These activities are substantially related to the hospital’s exempt purpose and do not constitute UBI.

3. Accomplishment of Exempt Purpose

The art museum of an exempt university provides eating facilities for visitors. Because there is a place to eat in the museum, the visitors are able to spend a greater amount of their time viewing the museum’s collections, exhibits and other educational facilities. This additional time would not be available if visitors had to interrupt their museum tours to travel to outside restaurants. Thus, the museum’s operation of the eating facilities is a service that contributes importantly to the accomplishment of its exempt purposes. Income from this activity is not UBI and not taxable.

4. Travel Tour Related to Exempt Purpose

An exempt university museum provides a travel tour program for university students, staff, and the general public. The organization works with various travel agencies and schedules numerous tours each year to various places around the world. It mails out promotional material and accepts reservations for a fee paid by the travel agencies on a per-person basis. A formal, documented educational program is a major part of these tours, with lectures, seminars, and guided tours of significant facilities. The organization also provides an employee as a tour leader. These tours do differ from regular commercial tours because they are operated as an educational experience . The tours are related to the organization’s exempt purpose. The revenue is not UBI and not taxable.

5. Used in the Exempt Function

A university operates an indoor ice arena and is open to the general public at designated times. The University also uses the facility to teach its students recreational sports facility management. Because the ice arena is used in the exempt function of the university, i.e. education, the revenue is not UBI and not taxable.

6. Sales Related to Exempt Function

An exempt university regularly sells computer hardware and software to students, faculty, and staff. Because personal computers increasingly play a fundamental role in business, education, and everyday life, a computer literate faculty, staff, and student body are essential to accomplish the university’s educational mission. The sales to students, faculty, and staff are related to the exempt function of the university. Revenue is not UBI and not taxable.

G. Exploitation of Exempt Functions

In some cases, the University’s exempt activities create goodwill or other intangibles that are capable of being exploited in a commercial way. When an organization exploits such an intangible through commercial activities, the fact that the revenue depends in part upon an exempt function of the University does not necessarily make the revenue taxable. Only if these commercial activities do not contribute importantly to the accomplishment of an exempt purpose is the income taxable. The following example illustrates this principle; however, the University has a policy that prohibits such sponsorship and/or endorsement.

1. An exempt university enjoys an excellent reputation in the field of biological research. It may exploit this reputation by endorsing laboratory equipment to manufacturers. Endorsing laboratory equipment does not contribute importantly to the accomplishment of the universities exemption. Accordingly, the revenue from selling endorsements is UBI and taxable.


Additional Examples of Potential Unrelated Business Revenue

  • Sale of computers and computer services to non-university users
  • Sale of programming services to non-university users.
  • Sale of advertising in performance programs (football, music, drama.)
  • Rental of recreation equipment to the general public.
  • Sale of recreation membership cards (swimming, privilege, etc.) to the general public.
  • Sale of routine analytical services to non-university users.
  • Rental of laboratory facility, with services, to non-university users.
  • Rental of scientific instruments to non-university users.
  • Provision of services for the lessee, or use of personal property, in connection with rental of real property.
  • Rental of hotel lodging, meeting halls or student housing to non-university users.
  • Rental of office space, with services, to non-university users.
  • Catering (food service, etc.) to non-university users.
  • Mail order catalog sales to non-university affiliated people.
  • Sale of audio-visual services to non-university users.
  • Sale of printing services to non-university users.
  • Sale of translation services to non-university users.
  • Rental of campus facilities, with services, to professional sports teams and or commercial enterprises.
  • Rental of image analysis equipment to non-university users.
  • Sale of testing services to non-university users.
  • Pharmacy sales (both prescription and non-prescription) to non-patients.
  • Sale of child care services to non-university users.
  • Sale of membership lists to commercial organizations.


Data taken from following: NACUBO FARM Manual; IRS publication on Unrelated Trade or Business; IRS Publication 598 and University of Michigan Standard Practice Guide.​

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