San Francisco State University Practice Directive-
Title: Taxation - Unrelated Business Income Tax (UBIT)
Reference number: 406.02.01
Division: Fiscal Affairs
Department: Office of the Associate Vice President/University Tax Services
Contact information: Young Kim, email@example.com, (415) 338-2325
Effective date: July 1, 2018
Revised date: Not Applicable
San Francisco State University (the University) is exempt from federal income taxation under §115(1) of the Internal Revenue Code for revenues generated from activities to further the core, post-secondary public educational mission of the University. However, income from operating a trade or business not related to the University’s mission is considered “unrelated business income” and is subject to the Unrelated Business Income Tax (UBIT), in accordance with §511(a)(2)(B) of the code.
The trustees of the California State University (CSU) authorize the University to collect the information necessary to prepare a complete and accurate United Business Income Tax Worksheet, and submit the worksheet to the CSU’s Chancellor’s Office to file for a system-wide consolidated UBIT Tax return with the Internal Revenue Service annually on tax form 990-T.
The objective of this practice directive is to ensure the University’s compliance with the federal, state, and local taxing authorities’ regulations and accountability and responsibility for UBIT reporting to the CSU Chancellor’s Office.
300 Practice Directive Statement
To ensure the University’s UBIT compliance with taxing authorities and the reporting responsibility to the CSU Chancellor’s Office, University colleges, divisions, and departments generating income that does not directly further the University’s tax-exempt purpose must consult with University Tax Services during the business in progress or prior to entering into new or changing financial activities that may generate business income subject to UBIT.
This practice directive applies to UBIT for the University and does not apply to auxiliary organizations (UCorp, the Foundation, and Associated Students). However, activities occurring between the University and the auxiliaries may require analysis to determine the applicability of this practice directive.
Unrelated Business Taxable Income - Unrelated Business Taxable Income (UBTI) is the net taxable business income after related expenses are deducted from gross Unrelated Business Income generated from an activity that is regularly carried on and not substantially related to an organization’s exempt purpose or function.
Substantially Related - Any activity that provides an important contribution toward the accomplishment of the University’s tax-exempt purposes. Determining whether an activity is “substantially related” requires an examination of the relationship between the activity and the University’s primary tax-exempt purpose.
An activity is related to an exempt purpose only when the conduct of the activity has a causal relationship to the achievement of the exempt purpose. The causal relationship must be substantial. For example, patient fees for consulting service done at the psychology clinic by students are clearly related to the exempt purposes of education, as are Executive Master’s in Business Administration fees for the College of Business.
Trade or Business - 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 under which a for-profit business would operate.
Regularly Carried On - Identifies the frequency and continuity with which the activities are conducted and the manner in which they are pursued. 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 the University over a period of only a few weeks does not constitute the regular carrying on of trade or business.
600 Practice Directive
601 Activities subject to UBIT
Any income that does not directly further the university's tax-exempt purpose (i.e. education and research) has the potential to become Unrelated Business Income. Income from an activity is subject to UBIT if ALL three (3) of the following criteria are present:
601.1 The conduct of the activity is “not substantially related” to the performance of the university’s exempt function;
601.2 The activity constitutes a “trade or business”; and
601.3 The activity is “regularly carried on” by the university.
More detail regarding these three criteria can be found in the §500 of this practice directive.
Common examples of activities that may generate Unrelated Business Income are:
- Use of University facilities such as the Conference Center, Hospitality Suite, or a gym, pool, or tennis courts by the general public for a fee.
- Providing services in connection with the rental of University facilities to outside entities for unrelated events, such as rental of facilities for an event that includes catering and similar services. As a general guideline, providing any services beyond utilities and overall building maintenance may create unrelated business income.
- Renting of personal property (e.g. University owned furniture) to non-University users.
- Sale of goods or services to non-University users. This may include the sale of computers, programming services, translation, printing, routine testing, and catering.
- Advertising (e.g. income from vendors that support the University’s athletics programs in return for an advertisement in the yearbook.)
- Exclusivity agreements, such as selling Coca-Cola products, when significant services are provided by the University in return (e.g. extensive involvement of University employees in joint marketing efforts to increase sales).
602 Statutory Exclusions and Exemptions
Income from certain unrelated activities may be non-taxable because of a statutory exclusions and exemptions. Some basic exclusions and exemptions from Unrelated Business Income are:
Income from an unrelated trade or business carried on primarily for the convenience of students, faculty or staff is not taxable. For example, when a university operates a laundry service for the purpose of laundering dormitory linens and students’ clothing, the revenue from the laundry service is not taxable as unrelated business income because the activity is for the convenience of the students.
602.2 Investment Income
Dividends, interest, capital gains and other income received from the holding of university investments are generally not taxable.
A royalty is passive income received from entities external to the University for the use of University property or rights and is usually paid as a percentage of receipts from using the property or as a fixed amount per unit produced. Royalty income is not taxable.
602.4 Real Property Rents
Rents from real property (i.e. buildings, apartments, commercial space) are not taxable. However, if real property is rented with the provision of additional services to the tenant the income may be taxable.
602.5 Personal Property Rents
Although rents from personal property (furniture, household appliances) are generally taxable, such rents may be non-taxable if they are an incidental amount (less than 10%) of the total rents received under a lease for real property.
602.6 Research Funding
The funding for any research conducted in any college, department, institute, or center within the University (including research conducted for the United States, its instrumentalities or agencies, or any state or political subdivision) is not taxable. However, when the activity constitutes mere testing it will not qualify as research and the income funding may be taxable.
801 Internal Reporting
Colleges, divisions, and departments must evaluate all sales and service activities, programs, and projects that occur within their unit to determine if potential unrelated business income activities may exist. To identify the existence of the UBIT activity, units should work closely with the University Tax Services throughout the year through analysis, consultation, and reporting.
Performing the UBIT analysis requires significant review of specific facts and circumstances to determine whether an activity may generate unrelated business income or whether an exemption or exception rule applies.
In conjunction with UBIT compliance, University Tax Services performs a variety of resource gathering such as sending questionnaires, visiting websites, reviewing records, and visiting sites as necessary. When activities subject to UBIT are noted or the responses to the questionnaire indicate UBIT may apply, University Tax Services will contact the department to determine taxable income calculations, develop allocation methods, and ensure accurate reporting.
Colleges, divisions, and departments should report any potential UBIT-reportable activities conducted to University Tax Services on a regular basis, but no less than annually. Examples of information that must be provided for such UBIT activities include:
- Copies of all contracts and/or agreements with individual or corporate sponsors approved by authorized University officials. The contracts/agreements should stipulate the Fair Market Value (FMV) of any income and/or item that is substantially benefiting the University.
- Copies of new Memoranda of Understanding (MOUs) signed with a third party for business with the University,
- An entire listing of rental activity (i.e. renting classrooms, theaters, parking lots, dormitory rentals, hospitality suites, conference center, sports facilities, boat rentals, guest house rental etc.), and rental agreements, if renting space or facilities to outside third-party vendors or individuals,
- Copies of fundraising materials and flyers, including internet source advertising activities, if conducted by a professional fundraiser.
802 CSU Chancellor’s Office Reporting
802.1 Unrelated Business Income Tax (UBIT) Worksheet
University Tax Services in Fiscal Affairs shall gather the necessary information from colleges, divisions, and departments for the UBIT Worksheet which, when complete, will be forwarded to the CSU Chancellor's Office.
802.2 Unrelated Business Income Tax (UBIT) Reporting Requirements
University Tax Services shall forward the UBIT Worksheet to the CSU Chancellor's Office no later than the reporting deadline designated by the CSU Chancellor’s Office to facilitate the preparation and filing of the system-wide Form 990T tax return.
802.3 Tax Liability and Payment
Once the tax liability has been calculated, the CSU Chancellor's Office will send a tax bill to the University, if applicable. The University must remit taxes due immediately upon receipt of the bill. Taxes paid by the University on behalf of a college, division, or department will be subsequently collected from the appropriate University unit(s) by University Tax Services.
900 Record Retention
Manual and electronic records related to UBIT will comply with the CSU’s record retention policies unless the University Controller and University Tax Services determine records should be retained longer.
IRS code §115(1), IRS code §511(a)(2)(B),
UBIT, Unrelated business income tax, University Tax Services, Fiscal Affairs, unrelated activities