Reporting Unrelated Business Income in Higher Education

Nonprofits and tax-exempt organizations often generate income that is not directly tied to their institutional mission. These types of income are considered unrelated business income, or UBI, and must be reported as such to the Internal Revenue Service.

James Moore partner and nonprofit tax leader Corinne LaRoche outlines some of the most common UBI scenarios for higher education institutions. She also provides clarification about 2020 updates to IRS reporting rules.

What is unrelated business income?

Unrelated business income is any activity that is not related to the mission of a tax-exempt organization. Exactly what that activity is depends on the industry.

“In higher education, this can be interesting because you often have a pretty broad mission in terms of education and serving your students,” Corinne said.

Recognizing and reporting UBI is not only important for your federal Form 990-T. You must also ensure that you’re filing UBI in the appropriate states. While Florida does not have a state income tax, you will owe taxes on that income in other states.

Common Sources of UBI in Higher Education

One of the tricky aspects of UBI is that some business activities may bring in both UBI and tax-exempt income.

“Generally the more detail you have on your invoices the better, as it makes it easier to determine what is taxable and what is not,” Corinne said.

Sources of UBI can include:

• Pass-through investment income: This is one of the most common sources of UBI. If your university foundation invests in partnerships or S corporations, some UBI will likely be passed through in the form of income or dividends. “When you get those Schedule K-1s, you need to look at the attachments,” Corinne said. “There’s usually a footnote in the attachments that points out which portion of your income from that entity is unrelated business income.”
• Facility rentals: Make sure you differentiate income generated from renting facilities in ways directly related to your purpose as an educational institution from those that are not. Renting space to students for student government meetings, for example, would be tax-exempt. Rentals for weddings or company retreats, however, are UBI. Also, be sure you charge separately for services such as event planning and catering, rather than lumping these under facility rentals.
• Sale of advertising: Generally, selling advertising space and generating circulation income result in unrelated business income.
• Fitness facilities: Fees for students’ and faculty’s use of fitness facilities are tax exempt. Charging members of the general public to use these facilities is UBI.
• Parking: Parking offered to the general public is not considered essential to your university mission and can be a significant source of UBI.
• Golf facilities: As with gyms and other fitness facilities, fees charged to the general public for using and/or renting your golf facilities are unrelated business income.
• Food and drink sales/catering: Selling food and drinks to the general public is not regarded as part of the organizational mission. Be sure to distinguish between catering for university-related events and for outside events.

 Clarification about Basketing or Siloing

Prior to 2020, all types of unrelated business income were aggregated on Form 990-T. Incomes from one activity could be offset by losses from another.

This changed with new UBI regulations. Now, each source of UBI must be reported separately on a 990-T and identified by North American Industry Classification System codes (NAICS), with each code used only once. This is sometimes referred to as basketing or siloing.

Also, losses from one activity can no longer be used to offset income from another. Net operating losses (NOLs) can only be used for the particular activity that generated the loss and are not calculated on the aggregated net loss from all businesses. Rental net operating losses can only be used to offset rental income, for instance, and parking net operating losses can only be used to offset parking income.

“I know that is a frustration to a lot of organizations who run really big profits in certain unrelated business activities, but run large losses in other ones,” Corinne said. “Now, they owe tax, whereas previously they were able to offset that tax.”

Keep in mind that if your organization has a certain activity that incurs losses every year, the IRS could eventually disallow those NOLs, reasoning that the activity is not income-producing and does not have a profit motive.

If you have further questions about UBI, reach out to your higher education CPA.

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