Unrelated Business Income Tax (UBIT)
Accounting and Financial Reporting
View policy pdf:Unrelated Business Income Tax UBIT Policy
Institutions of the University System of Georgia (USG) are tax-exempt as instrumentalities of the State of Georgia under Section 115 of the Internal Revenue Code. Similarly, institution foundations are exempt under Section 501 (c)(3) of the Internal Revenue Code.
As tax-exempt entities, USG institutions and foundations are exempt from federal income tax for activities that further their educational purpose. However, they are not exempt from income tax imposed on activities that are substantially unrelated to exempt purposes, called “Unrelated Business Income” or UBI, even though these activities may bring in funds to support exempt operations.
The University of Georgia follows the USG Board of Regents policy on Unrelated Business Income. A link to the USG Procedures Manual can be found under Related Information.
The University of Georgia also follows Internal Revenue Service guidelines for tax
on unrelated business income of exempt organizations. A link to the IRS guidelines
is also provided under Related Information.
Reason for Policy
TheUniversity mustfollowproceduresrelatedto UBI andits associatedtaxin ordertofollow theInternalRevenueServicefederal taxcode.
As defined by the Internal Revenue Services (IRS), an activity will have unrelated business income and be subject to unrelated business income tax if it meets three requirements:
- The activity is a trade or business
- the activity is regularly carried on, and
- the activity is not substantially related to furthering the exempt purpose of the organization.
NOTE: There are several exceptions to this general definition of unrelated business income. See the FAQ’s below for the exceptions.
UGA departments are required to complete a UBI questionnaire related to their business activity after the close of each fiscal year. The questionnaire is used to identify activities that may generate unrelated business income and would need to be included on the University’s tax return. The Accounting Office will review completed questionnaires for possible UBI activity. After completing the review, the Accounting Office will work with the school/college/unit financial staff to identify any UBI activity and help each unit determine what financial information is required for tax reporting purposes. Departments should not make this determination.
There are cases where an activity generates a source of funds that are used to carry-out the mission of the University. However, the IRS places particular emphasis on the size and extent of the activity. If an activity is conducted on a scale larger than reasonably necessary to carry out the exempt purpose, it is more likely to be treated as unrelated business income. Examples of unrelated business activities can be seen in the Policy Appendices section.
Please consult the IRS guidelines for UBIT and the USG Procedures Manual section on
UBI for further information.
Unrelated Business Income (UBI): gross income from a trade or business regularly carried on by a college or university, which is not substantially related to the performance of its exempt purpose or function, except that the institution uses the profits derived from this activity.
Trade or Business: A trade or business includes any activity conducted for the production of income from selling goods or performing services. An activity must be conducted with the intent to make a profit to constitute a trade or business.
Regularly Carried On: Activities regularly carried on would be those that show frequency and continuity and are pursued in a similar manner as a for-profit organization that would conduct a comparable activity.
Substantially Related: Activities substantially related would be those that generate income and contribute to the accomplishment of the organization’s exempt purpose. The University of Georgia’s exempt purposes are education, public service, and research, so any income generated from activities whose purpose is NOT substantially related to one of those purposes would be characterized as unrelated business income and would be subject to federal income tax rules.
For documentationrelatedto unrelatedbusiness incometax,includingworkingpapersandquestionnaires,recordretentionis seven(7)years.
What are the exceptions to unrelated business income?
- Convenience of Members: revenue from an activity conducted for the convenience of UGA faculty, staff, and/or students in connection with their respective roles does not generate unrelated business income A typical example would include the university cafeteria/dining hall services provided to UGA faculty, staff and/or students.
- Volunteer Exemption: Eighty-five per cent (85%) or more of the work related to an activity is performed by volunteers.
- Donation Exemption: Eighty-five per cent (85%) or more of the income is related to donated merchandise, property or services, even if the labor to operate the activity is paid or volunteered.
- Education Function Exemption: Activities are important to the overall educational function of the institution, such as a performing arts theater, symphony, etc.
- Passive Participation Exemption: Passive income such as dividends, interest, annuities, royalties, licensing agreements, etc., without any active business participation or management.
- Student Participation Exemption: Activities include substantial student participation, which directly supports the institution’s educational program(s).
How does unrelated business income affect UGA?
Each year, UGA must perform an analysis to determine the amount of unrelated business
income tax to be reported to the IRS. Auxiliary, continuing education, and departmental
sales and service activities are areas of consideration for determining unrelated
business income for the University.
Responsible University Senior Administrator: Vice President for Finance & Administration
Responsible University Administrator: Associate Vice President for Finance Division
Policy Owner: Accounting
Policy Contact: Director of Accounting
Phone Number: 706-542-6874