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Section 16 – Taxes

Section 16.6 – Unrelated Business Income (UBIT)

Date: 11/2/06 — Approved: Finance Board

Note: This policy is intended for the purpose of informing AS employees and other AS-related individuals about relevant tax issues. This policy does not constitute legal or tax advice. Individuals should consult with their attorneys or tax professionals for advice on personal issues.

Overview

The Internal Revenue Service (IRS) has recognized the AS as exempt from federal income tax as an organization described in IRC §501(c)(3). The AS's IRS Determination Letter received from the IRS confirms the AS's exempt status. The AS is not, however, exempt from tax imposed by the IRS on unrelated trade or business activities.

UNRELATED BUSINESS INCOME TAX (UBIT)

For an activity to be considered an unrelated trade or business activity, of the following criteria must be satisfied:

1. the activity must be a "trade or business",
2. it must be regularly carried on, and
3. it must not be substantially related to any IRC §501(c)(3) purpose.

Federal income tax is imposed on the AS's unrelated business income. This tax is referred to as unrelated business income tax (UBIT).

Trade or Business

The term "trade or business" generally includes any activity carried on for the production of income from selling goods or performing services. A trade or business activity is one in which a profit is expected to be made. However, where an activity that is carried on for a profit constitutes an unrelated trade or business, no part of the trade or business is excluded from the for profit classification merely because it does not result in a profit in a particular year.

Regularly Carried On

Business activities ordinarily are considered regularly carried on if such activities show a frequency and continuity and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Income production or fundraising activities lasting only a short period of time conducted on an annual basis are not considered regularly carried on.

Not Substantially Related to Exempt Purposes

The conduct of a trade or business is not substantially related to an IRC §501(c)(3) purpose solely because the AS may need (1) the income derived from the business or (2) use the profits for exempt purposes. Ordinarily, selling products that result from the performance of the AS's exempt activities is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt activities are completed. Also, the size and extent of business activities must be considered when determining whether the activities are substantially related. If the activities are conducted on a larger scale and more extensive than reasonably necessary for the performance of the exempt purposes, the activities are considered unrelated. Moreover, an activity does not lose its identity as a trade or business merely because it is carried on within a larger group of similar activities that may, or may not, be related to the University's purposes.

FILING REQUIREMENTS AND RATES

The AS annually files Form 990-T , Exempt Organization Business Income Tax Return to report unrelated business income generated by the AS Tax on this return is computed at current corporation tax rates.

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