Exempt Organizations: Be Proactive with UBIT Compliance

Whether large or small, exempt organizations need a plan for UBIT compliance. At a minimum, the plan should include:

  • Education about the UBIT in general
  • Specific direction on business activities the organization already conducts
  • Contact person to consult before engaging in new business activities
  • Policy to notify the organization’s attorney or accountant regarding proposed new business activities that might generate UBTI  

Awareness. As with so many other things, the first step in UBIT compliance is awareness. In this regard, the term “tax-exempt” organization is misleading. Particularly with smaller exempt organizations, trustees and employees may interpret “tax-exempt” literally to mean that their organization does not have to pay taxes — ever. This notion may be reinforced if the organization is exempt from state income, sales, and property taxes. Unless they are aware of the UBIT, exempt organization personnel have no reason to examine or report particular income-generating activities.

Education about the UBIT starts at the top. All trustees, directors, officers, and managers should be aware of the tax and its basic elements. Those who manage the organization in its day-to-day activities generally require more familiarity with the specifics of the tax. Responsibility for UBIT compliance may be delegated to a tax department or controller.

Example: At New York University, the Controller’s Division provides tax services, including tax compliance. In an Office of General Counsel Memorandum entitled Unrelated Business Income Tax, dated February 15, 2012, NYU’s general counsel explains the UBIT and common sources of UBIT in an understandable three-page document. The memorandum encourages employees to seek advice from the General Counsel’s Office and to report all UBTI to the Tax Division of the Controller.

Example: The Tax Compliance Office of Southern Illinois University maintains a Tax Guide for Academic and Administrative Departments. The Guide contains a lengthy discussion of the UBIT, including the basic requirements, exceptions, common activities that raise UBIT concern in the university context, special rules for corporate sponsorships, computation of the UBIT, and filing requirements. The UBIT discussion concludes by stating that it is “critical” for university departments to conduct a “methodical and comprehensive review” of all their income-generating activities and giving names of university contact persons.

Guidance to personnel. If an exempt organization already conducts unrelated business activities, specific guidance on how the tax applies to those activities should be accessible to those involved. One of the most common unrelated business activities is the sale of advertising. Many exempt organizations publish newsletters containing paid advertising. Advertising income is almost always taxable. Thus, employees who prepare a newsletter need to be aware of the treatment of advertising income so they can keep accurate records of the expenses and employee time expended for soliciting and publishing advertising.

Example: A good example of providing specific information about existing or potential unrelated business activities is an information document on Baylor University’s website entitled Unrelated Business Taxable Income (UBTI). The Tax & Compliance Accounting department explains that activities which are “in line with” the university’s exempt purposes are not taxed, but that activities which are not related to its exempt purposes may be subject to the UBIT. Then the document lists the three basic requirements for operation of the UBIT: trade or business; regularly carried on; and not substantially related. Following are links to various activities that might generate UBTI in the university setting, including Advertising Income, Bookstore Operations, Concession Sales, Participation in Partnerships, Professional Entertainment Events, and Use of Facilities by the General Public. For each topic, the university provides succinct explanations about how the UBIT applies, including relevant case law and IRS rulings. Under Advertising Income, for example, the document explains how income from advertising in student publications may not be subject to the tax, citing both a treasury regulation and a technical advice memorandum.

Advisors’ Role. Advisors to exempt organizations need to familiarize themselves with the UBIT and specifically about UBIT issues that have arisen in the activities of organizations similar to the ones they advise. For example, the UBIT applies more leniently to churches. Thus, advisors to churches (including temples, mosques, and the like) need to be familiar not only with UBIT basics but also with the special rules for churches. Similarly, special rules apply to social clubs and voluntary employees’ beneficiary associations (VEBAs) under which they are exempt from the UBIT only on income from members and income set aside for charitable purposes. Advisors to social clubs and VEBAs need to make the organizations aware that they are taxed on their investment income and income from nonmembers.

Best compliance results can be obtained when exempt organization employees are trained to run any new income-producing activities by the UBIT contact person.

Example: In a web page entitled Unrelated Business Income Tax, Oakland University explains that new activities at the university are reviewed by the Tax Compliance section of the Controller’s Office. Employees are warned that UBIT issues are highly dependent on the particular facts and circumstances and encouraged to contact the Tax Compliance section with any questions.

Although the exempt organizations discussed in the examples are universities with administrative resources to handle UBIT issues, even smaller exempt organizations can formulate an effective UBIT compliance plan. With help from their advisors, exempt organizations can educate their personnel and establish procedures for examining and reporting income-producing activities.

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