Written by Andrew Coats.
The IRS defines Unrelated Business Income (UBI) as the “income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption”. Organizations subject to the tax on unrelated business income are taxable at corporate rates on that income.
NC State University is an agency of the State of North Carolina and is exempt from Federal and State Income Tax. This status exempts NC State from paying income tax on net profits earned in activities related to its exempt purposes, such as:
- Charitable, educational, research, scientific or literary
- Tests for public safety
- Fostering of national or international amateur sports competitions
- For the prevention of cruelty to children or animals
However, the University’s tax-exempt status does not extend to activities considered unrelated to its exempt purposes. Three elements must all be present for an activity to be considered unrelated to the university’s tax-exempt purposes:
- The activity must be a “trade or business,”
- It must be regularly carried on
- It must not be substantially related to the University’s exempt purposes.
Below is just a summary of the types of NC State University transactions that may or may not be considered subject to the Unrelated Business Income Tax (UBIT).
The following revenue generating activities are considered exempt from UBIT:
- Goods or services sold only to or for the convenience of current students, faculty or staff of NC State University
- Goods or services sold only to other North Carolina state agencies or to the Federal government
- A one-time sale
- Activities where over 85% of the total income earned is generated by unpaid volunteers or from the sale of donated goods
- Activities where over 50% of the total income earned is generated by students as part of an educational curriculum
- The rental of real property only (i.e. rental of a room, meeting space)
- Income from royalties
- Income derived by research (contact us for the IRS specifications)
- Admission fee revenue from athletic events or performances of students
- Income generated from the exchange or rental of mailing lists from another tax-exempt organization
- Dividends, interest, gains or losses from the sale of investment property
- Sponsorship income received where the sponsor receives only recognition of their business name or registered slogan in exchange for the sponsorship
Revenue generating activities that may be subject to UBIT include:
- Any activities (not exempted above) with sales or services sold to the general public. Please note that alumni are considered to be the general public.
- Sponsorship income where the sponsor receives an advertisement that includes more information than just their name or registered slogan (i.e. rate or discount information, incentive wording, call to action, inducement to buy, etc.)
- Rental of personal property (equipment, furniture, etc.) with or without the rental of real property
The above list is not inclusive and many revenue generating activities necessitate a deeper dive into the business model behind the activity to determine if there is any potential unrelated business income. It is important for departments that have sales and service revenue, especially those that deal with external entities, to perform a comprehensive review of each income producing activity it conducts. Our surveys in both online and Word Doc formats are helpful ways for Tax Compliance to enlist the general campus aid in ensuring that the university remains compliant under Federal and State tax laws. When applicable, completion of the survey or questionnaire is requested by September 30, 2023.
Unrelated Business Income is not a bad thing; it usually means that a department has generated revenue from an idea that is beneficial to the department. Tax Compliance is here to assist in keeping as much of the department’s business profits as possible, and the University as a whole, compliant with regulatory agencies.
Since UBIT is a complex tax, please contact University Controller’s Office, Tax Compliance at tax_compliance@ncsu.edu if you have any questions. You may also read further about UBIT on the University Controller’s Tax Compliance UBIT page, or at IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations.