Unrelated business income (UBI) is the income from a trade or business activity regularly carried on by a tax-exempt (non-profit) organization, such as Stanford, 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. Refer to Administrative Guide Policy 1.5.3: Unrelated Business Activity for specific university policy with respect to the conduct of unrelated business activities.
Requirements for UBI
The three following requirements must be met for UBI to occur:
- Trade or business activity: The term "trade or business" generally includes any activity carried on for the production of income from selling goods or performing services.
- Regularly carried on: Business activities ordinarily are considered regularly carried on if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial organizations.
- Not substantially related to the tax-exempt purpose of the university: A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). Whether an activity contributes importantly depends in each case on the facts involved.
Excluded Trade or Business Activity
The following activities are specifically excluded from the definition of unrelated trade or business:
- Volunteer Workforce: Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business.
- Example: Volunteers who serve food and beverages to golfers during a golf tournament benefiting a university's scholarship program. Since volunteers provide substantially all the labor needed to run the event, it is not considered unrelated business income.
- Activities for the Convenience of the University: A trade or business carried out primarily for the convenience of its members, students, patients, officers and employees is considered a related trade or business.
- Example: If a university offers a laundry service to its students, such a business is considered related.
- Qualified Sponsorship Payments:
- Soliciting and receiving qualified sponsorship payments (QSP) is not an unrelated trade or business and such payments are not considered unrelated business income. A QSP 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 acknowledgement of the business name, logo or product lines in connection with the organization's activities. "Use or acknowledgement" does not include advertising of the sponsor's products and services.
- Providing facilities, services, complimentary tickets or other privileges to the sponsor in connection with a QSP does not affect whether the payment is a QSP. Instead, the provision of such privileges is treated as a separate transaction in determining whether the university would have unrelated business income from the payment. If such additional privileges are not of substantial benefit, the payment will not be subject to tax.
- A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. Advertising includes:
- Messages containing qualitative or comparative language, price information or other indications of savings or value
- 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. Mere distribution or display of a sponsor's product by a university to the public at a sponsored event, whether free or for remuneration, is considered use for acknowledgement of the product rather than advertising.
- A payment is not a QSP if its amount is contingent upon the level of attendance at the event, broadcast ratings or other factors indicating the degree of public exposure to the event.
- The selling of donated merchandise is not an unrelated trade or business.
- Unrelated business income does not include the distribution of low cost items incidental to soliciting charitable contribution if:
- The recipient did not request the distribution
- The distribution is made without the express consent of the recipient
- The item is accompanied by a request for a charitable contribution and a statement that the recipient may keep the article regardless of whether a contribution is made. An article is considered low cost if its cost to the tax exempt organization does not exceed $7.40 (adjusted annually for inflation).
Exclusions from Unrelated Business Income
The following types of income are generally excluded when figuring unrelated business income. However, the exclusions do not necessarily apply to income from debt-financed assets (described below):
- All dividends, interest, annuities, payments with respect to securities, loans and income from notional principal contracts.
- Royalties, including overriding royalties, are excluded from unrelated business income. A royalty is a payment relating to the use of a valuable right, including trademarks, trade names or copyrights. Royalties do not include payment for personal services.
- Rents from real property are generally excluded from unrelated business income. Rents from personal property are not excluded. In the event of a mix of personal and real property, the entire lease is exempt if the portion due to personal property is less than 10 percent. If the portion is between 10 and 50 percent personal property, then only the portion attributable to the real property is exempt. If the portion of personal property exceeds 50 percent, the entire lease is subject to tax.
The rental exclusion does not apply to leases based upon a percentage of the profit earned by the tenant. To be exempt, a lease must be either a fixed amount of rent, a percentage of sales or a combination thereof.
- Income from research at a university is exempt, whether fundamental or applied. The term “research” does not include activities of the type normally carried on incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment.
- Gains or losses from the sale, exchange or other disposition of property are exempt from unrelated business income other than:
- Stock in trade or other property of a kind that would properly be included in inventory
- Property held primarily for sale to customers in the ordinary course of a trade or business
- Cutting of timber that an organization has elected to consider as a sale of timber
- Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business income, but only if written in the course of the organization's investment activities.
Other Sources of Unrelated Business Income
- A university may have unrelated business income as a member of a partnership. If so, it must include its share of the taxable income of the partnership as though it had operated the business itself.
- The share of any income of an "S" corporation will be taxable regardless of the actual source or nature of the income. A university's share of any interest or dividend income (otherwise exempt) from an "S" corporation will be subject to tax.
- Interest, annuities, royalties and rents from a controlled taxable corporation are subject to tax, if those items reduce the tax of the controlled corporation. To be controlled, the exempt organization must own more than 50 percent of the stock in a corporation or more than a 50 percent interest in a partnership.
- Investment income that would otherwise be excluded from tax must be included to the extent it is derived from debt-financed property. The term debt-financed property means any property held to produce income (including gain on sale) for which there is an acquisition indebtedness at any time during the tax year or during the 12-month period prior to the property's disposal. Property includes real estate, tangible personal property and corporate stock.