Issue

Halloween is coming and we don’t mean to be scary, but… as the IRS Exempt Organizations Division makes unrelated business activities a priority (see the most recent IRS Priority Guidance Plan), it would behoove all colleges, seminaries, and universities to do an analysis of these activities to ensure that they are in compliance with IRS rules. We advise that EVERY Christian college has an “analysis of income producing activities” document in their files showing that they have measured their unrelated business activities.

Situation

Marathon Bible College (MBC) is a public charity and a school under I.R.C. sections 501(c)(3) and 170(b)(1)(A)(ii). They heard us speak at a national higher education conference where we stated, “If you look at your Form 990, on Part I, Lines 7a and 7b, and find zeroes on those lines, you could be at risk of hearing from the IRS and could face penalties for failure to file Form 990-T.” MBC’s Director of Finance calls to say that she found “zeroes” and wonders what MBC needs to do. She states, “we don’t have any unrelated business income, we don’t think.”

We tell her that virtually all colleges have some unrelated business activities – sponsorship income, rental income, investment income, sales of merchandise, summer camps, donor acknowledgments, etc. Further, we tell her that one analysis option would be to work with us on a “UBIT Assessment”. This project generally takes 3-4 hours of time via video conference. We go through a 55-question checklist, review the college’s revenue accounts from their trial balance, and produce a memo and summary “grid” that analyzes your income-producing activities while delineating what unrelated business activities your college is engaged in and whether or not tax filings are needed. Remember, there are myriad “exclusions” in the UBIT arena.

Rules

From the Form 990 instructions:
Line 3a. Check “Yes” on line 3a if the organization’s total gross income from all of its unrelated trades or businesses is $1,000 or more for the year. See Pub. 598, Tax on Unrelated Business Income of Exempt Organizations, for a description of unrelated business income and the Form 990-T filing requirements for organizations having such income.

From IRS Publication 598:
The tax on unrelated business income applies to most organizations exempt from tax under section 501(a). These organizations include charitable, religious, scientific, and other organizations described in section 501(c), as well as employees’ trusts forming part of the pension, profit-sharing, and stock bonus plans described in section 401(a).

Colleges and universities. … The tax is on the unrelated business income of both the universities and colleges themselves and on their wholly owned or controlled tax-exempt subsidiary organizations. It is immaterial whether the business is conducted by the university or by a separately incorporated wholly owned or controlled subsidiary. If the business activity is unrelated, the income in both instances will be subject to the tax. If the primary purpose of a wholly owned or controlled subsidiary is to operate or conduct any unrelated trade or business (other than holding title to property and collecting income from it), the subsidiary is not an exempt organization, and this rule does not apply.

Bottom Line

The IRS is actively looking at instances of unreported unrelated business income. Higher ed institutions are one place they are zeroing in on (note that the IRS does not target!). Between now and the end of your next tax year, it would behoove every school to analyze your unrelated business activities and document your findings – the sooner the better.

If you need more information about UBIT, touch base with your skilled, knowledgeable, and experienced not-for-profit tax professional. They will be able to help you navigate these potentially treacherous waters.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.