IRS Scrutinizes Universities For Unrelated Business Taxable Income

The IRS has recently begun scrutinizing several universities, including Notre Dame, Purdue, the University of Texas at Austin, Texas A&M, the University of North Carolina, the University of Georgia, Lamar University, the University of Central Florida, Yeshiva University, Suffolk University, and Harvard, for failing to accurately report unrelated business taxable income.

Generally, not-for-profit universities are exempt from paying taxes on tuition or other money that relates directly to their educational mission.  However, the government still requires that all tax exempt entities pay income taxes on a class of revenue known as “unrelated business taxable income (UBTI).”  UBTI is income from an unrelated trade or business, regularly carried on, that is not substantially related to the performance of a tax exempt organization’s exempt purposes.  UBTI is a broad category that can encompass revenue from college-owned bookstores, restaurants, sports arenas, and other venues when they sell goods and services to the public.  An exempt organization that has $1,000 or more gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return.

UBTI can be a problem in any situation where favorable tax treatment is sought.  Tax exempt entities, charitable trusts, and retirement accounts must all be free of UBTI in order to maintain their tax-favored status.  If UBTI is earned, it is generally taxed at the corporate or trust tax rates, depending on the circumstances.  Often, it can be confusing trying to determine whether a particular source of income qualifies as UBTI because of the difficulty encountered when trying to determine if a trade or business is “substantially” related to a tax exempt organization’s exempt purposes and whether that trade or business is “regularly” carried on.

When one is seeking to establish a tax exempt entity that may be investing in a trade or business, it is best to consult with a knowledgeable tax attorney at the outset, rather than risking the possibility of incurring unplanned UBTI.  If you have questions about your tax exempt situation, contact an Attorney in Jacksonville who can assist you today.