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UF & UBIT: Unrelated Business Income Tax Presented by: Andrea Newman, CPA September 4, 2013.

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Presentation on theme: "UF & UBIT: Unrelated Business Income Tax Presented by: Andrea Newman, CPA September 4, 2013."— Presentation transcript:

1 UF & UBIT: Unrelated Business Income Tax Presented by: Andrea Newman, CPA September 4, 2013

2 Background & Basics of UBI UBI Exclusions Potential UBI-Generating Activities Applicable Real Life Examples

3 What is Unrelated Business Income Tax?

4 UBIT Under Internal Revenue Code Section 115, the University of Florida is tax-exempt as an instrumentality of the State of Florida – Exempt purposes of state colleges and universities include all of the purposes and functions described in Code Section 501(c)(3) – Federal income tax purposes the University may engage in certain activities

5 UBIT Defined Income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational or other purpose that is the basis of the organizations exemption. The following three criteria must be present: 1.A trade or business 2.Regularly carried on 3.Not substantially related

6 If your activity a trade or business? Trade or business – Any activity carried on for the production of income from selling goods or performing services. – If the University/department is selling goods or services to generate income, even if it is conducting the activity within the larger group of activities related to its exempt purpose, the activity is a trade or business. – While the University/department is carrying on its daily exempt function, it could also be carrying on activities that are taxable. - Important Factor To Consider - Whether A Profit Motive Exists

7 Is your activity carried on? Regularly carried on – If activities show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Key: The frequency in which for-profit operates. If an activity is a type that a for-profit entity would conduct on a year-round basis, the same activity by an exempt entity will not be regularly carried on if it is for a few weeks.

8 Is your activity not substantially related? Related to University Exempt Purpose – To be related to the Universitys educational or research exempt purpose, there must a substantial causal relationship. – The activity must contribute importantly to the accomplishment of the exempt purpose (other than the Universitys need to produce income). Size & Extent – Particular emphasis is placed on the size and extent of the activity. – If an activity is conducted on a scale larger than reasonable necessary to carry out the exempt purpose, it is more likely to be treated as unrelated. Dual Use of Assets & Facilities – Use for both exempt and commercial purposes will not necessarily exempt the income derived from commercial use unless the business activity contributes importantly to the accomplishment of exempt purposes.

9 Substantially Related Income Factual Question: Is there a relationship between activity and accomplishment of UFs exempt purpose? – Direct relation to the Universitys exempt purpose. IRS compares incorporation documents and operations New activities should be reviewed to ensure consistency with exempt purpose Just because an activity raises needed funds for the University/department does not mean that the activity is exempt

10 Background & Basics of UBI UBI Exclusions Potential UBI-Generating Activities Applicable Real Life Examples

11 Exclusions From UBIT Volunteer Labor – Activities in which substantially all (85% or more) work is performed by volunteers Convenience of University Members – Activities operated for the convenience of members, students, patients, or employees Donated Merchandise – Sales of merchandise that is substantially all (85% or more) donated to the University

12 Excluded From Taxable Income Dividends Interest Annuities Royalties Rental income from real property Income from certain forms of research

13 Royalties Tax, duty or compensation paid to owners of a patent, copyright, mineral interest, or other property right for the use of it or the right to exploit it Royalty exclusion includes: – Overriding royalties – Net profits royalties – Royalty income received from licenses by the University as the legal and beneficial owner of patents assigned to it Exception: Royalty income derived in part from the performance of services – payment will not constitute royalty income

14 Rents Rules vary depending on whether they are derived from real or personal property or from a mixed lease of both real and personal property Real Property – Generally, rents from real property are excluded: – Property is not debt financed – Additional services are not rendered – Are not dependent on percentage of profits

15 Rents Rental of real estate is generally not taxable The following may be taxable: – Rental based on income or profits of lessee is taxable – Services other than customary rental may taint rental – Portion for personal property rental is generally taxable – Parking rental is generally taxable – Hotel income is generally taxable – Debt-financed rental is generally taxable Special rules that apply to Universities, i.e. qualified organizations

16 Rents Personal Property – Generally, rents from personal property are excluded only if there is a mixed lease and the rents attributable to the personal property are an incidental part of the total rents received under the lease Rental of personal property is generally taxable – Ignored as incidental if value is 10% or less – Separated, if between 10% and 49% – If 50% or more – then its all taxable

17 Rents Services provided with the rental – Other than customary landlord/tenant maintenance – For benefit of the tenant – May render entire rental as taxable Examples: – Supplying of maid or linen servicesservices – Furnishing of heat and lightnot services – Cleaning of public entrances, exits, stairways, or lobbies not services – Collection of trashnot services – Renting of parking spaces where attendant is on duty services – Providing security services to a parking garage services

18 Background & Basics of UBI UBI Exclusions Potential UBI-Generating Activities Applicable Real Life Examples

19 Potential UBI-Generating Activities Advertising Corporate sponsorships Contract research Sales of Merchandise Licensing Agreements / Affinity Income

20 Advertising Any language which is an inducement to purchase a product or service Qualitative or comparative language Price information Indication of savings Endorsements Call to action

21 Examples of Activities Which May Generate Advertising Income Sports programs Scoreboards Sponsorships of a departmental newsletter Student newspaper Periodical advertising Web-site advertising TV & radio broadcasting rights

22 Exclusivity Arrangements Generally not UBI: Exclusive sponsorship as an arrangement that acknowledges the payor as the exclusive sponsor of an exempt organizations activity, or the exclusive sponsor representing a particular trade, business, or industry. Generally is UBI: Exclusive provider arrangement is defined as one that limits the sale, distributions, availability, or use of competing products, services or facilities in connection with an exempt organizations activity.

23 Exclusivity Arrangements: Potential UBI Example Contracts entered into by colleges and universities which grant a company exclusive rights to provide a product or service. For example – Pouring rights contracts or athletic apparel contracts.

24 Treatment of Corporate Sponsorship Income If deemed to be a Qualified Sponsorship Payment, the contributions are not considered UBI. A Qualified Sponsorship Payment is one in which the sponsor does not receive any arrangement or expectation of a substantial benefit. An organization can acknowledge the sponsors payment as long as it is not considered advertising income, which would be considered UBI.

25 Corporate Sponsorships Substantial return benefit includes message: – Qualitative or comparative language, – Price information or indications of savings or value – Endorsement for any of sponsors services or products

26 Corporate Sponsorships Permissible Activities: – Acknowledge the corporations name, logo and general contact information. – Value-neutral displays of the sponsors products/services. Likely to be Deemed Advertising: – Providing prices or qualitative information. – Providing more than token facilities, services, privileges. – Accepting contingent sponsorship payments. – Providing ads or acknowledgement in regularly published materials. – Link to sponsors internet site

27 Contract research may constitute unrelated business income Related to exempt purposes – How to tell Is the project scientific? – Must be yes Is the project research? – Must be yes Is the project in the public interest? – Must be yes Excluded from unrelated business income Conducted for federal or state governments Conducted for colleges and hospitals Fundamental research available to the public The regulations are complex and require a contract by contract analysis.

28 Sales of Merchandise In general, sales of merchandise is separated into three major categories: 1.Directly educational materials – nontaxable 2.Non-educational, convenience exception – nontaxable 3.Other merchandise sales – taxable Exempt Sales: – IRS College and University Audit Examination Guidelines Items that are required or otherwise necessary for participation in a course of instruction and other educational materials that further the unstructured intellectual life of the campus community Non-educational items that are low in cost and in recurrent demand may fall under the convenience exception

29 Sales of Merchandise Taxable Sales – IRS holds that the convenience exception does not apply to items with a useful life of more than one year Exception: Logo novelty item or logo clothing – Sales to the general public do not fall within the convenience exception

30 Sale of Merchandise Unrelated, excluded or related revenue? Unrelated Examples:Excluded Examples:Related Examples: University book store items sold to Alumni Non-Education items from a Universitys book store sold to students at a university (convenience) Educational materials from a Universitys book store sold to students at a university University cafeteria providing catering services to other businesses University catering to university departmental meetings (convenience) University catering to students, faculty, and staff (similar to excluded since for convenience) Hospitals pharmacy sales to non- patients, non-employees Hospitals pharmacy sales to employees (convenience) Hospital pharmacy sale to patients Sales where volunteer labor is a material factor (volunteer) Sale of merchandise that was donated

31 Licensing Agreements /Affinity Income Royalty exclusion is commonly used by exempt organizations to exclude licensing fees from UBIT. IRS generally agrees so long as the exempt organization plays a passive role in the licensing agreement. – Active Involvement – The IRS views the royalty payment as consideration for services performed and not a royalty.

32 Licensing Agreements /Affinity Income Will agreements pass the IRC 512(b)(2) test? Are they licensing rights to intangible property? Are payments based on gross revenue? Are they providing any taxable services? Are payments for services priced separately? Are payments allocated between royalty & service?

33 Licensing Agreements /Affinity Income: Rough Set of Guidelines Avoid providing specific services (i.e. advertising, promotion, endorsements, etc.) – Ok to review materials for quality control – Agreement should expressly state that the organization will not provide specific services Only services should be de minimis or courtesy services Arrangements necessitating substantial services – Create a separate agreement for the service component and allocate a portion of the income to services Specifically terming the arrangement a licensing agreement and referring to the payments as royalties – Avoids certain amount of discrepancy

34 Background & Basics of UBI UBI Exclusions Potential UBI-Generating Activities Applicable Real Life Examples

35 Advertising v. Bookstore Advertising ExemptReportable Sale of commercial advertising and underwriting time on a campus radio station. Students assist in subscription drives and underwriting and advertising sales programs. Sale of commercial advertising space in campus newspapers, journals, magazines, or other periodicals Sale of advertising space in souvenir programs for sports events (or music or drama performances). Sale of commercial advertising in sports media guides. Sales are made by a full-time person throughout the year. Bookstore ExemptReportable Sale of books, athletic clothing, general school supplies, computer hardware and software, and items that are low in cost and in recurrent demand to University members and the general public. Sales of computers to students or faculty members. Sales of computers at a discount to other educational institutions.

36 Career Services v. Debt-financed Property Career Services ExemptReportable Career services, such as resume critiquing, interview coordination, and other job placement assistance provided to alumni for a fee. Debt-financed Property ExemptReportable Rental of apartments to students and non-University members. The apartment building is subject to a mortgage (**special rule pertaining to Universitys)

37 Equipment Rentals v. Equipment Sales Equipment Rentals ExemptReportable Rental of equipment (e.g., outdoor recreation equipment, scientific instruments, etc.) to non-University members. Equipment Sales ExemptReportable Sale of obsolete equipment to the general public. Sale of electronic equipment to non-University members.

38 Facilities Usage v. Hotel & Restaurant Operations Facilities Usage (No Lease) ExemptReportable Rental of facilities to non- University members for conferences and symposiums. Use of University-owned golf course by alumni, spouse and guests of students, faculty and staff. Use of recreational facilities for classes offered to the general public and alumni. Hotel & Restaurant Operations ExemptReportable Sales to students, students families and friends, prospective students and their families, participants in school functions and activities, and persons having business with the school. Sales to tourists, spectators at sporting events (including alumni), and the general public.

39 Entertainment Events v. Rents Entertainment Events ExemptReportable Events conducted in which the schools own students put on the event (i.e., a play, concert recital, or ballet). Events involving professional entertainers (i.e. a professional performance involving paid entertainers). Rents (Lease Basis) ExemptReportable Rental of campus building or space within a building. Includes leasing for a fixed periodic fee or a fee that is a percentage of gross income. Leasing of property for a fee that is based on a percent of net income or profit. Rental of athletic facilities and equipment to non- University members. Revenue is derived from rental of real property (95%) and personal property (5%).

40 Parking Facilities v. Sales Parking Facilities ExemptReportable Income from University owned parking facilities used by faculty, staff, and employees. Operation of a parking facility that is used by members of the general public. University enters into a lease with a third party who operates the Universitys parking facility and pays fixed rent to the University. Sales ExemptReportable Sale of clothing and other items to the University community that are embossed with the University seal. Sale of emblematic items (T- shirts, mugs, caps, pennants, etc.) to alumni and the general public. The sales are made by mail order on a regular basis. Sale of excess crops used in research. The crops are sold in an as is condition when mature.

41 Questions Andrea Newman, CPA James Moore, CPAs Email: Phone: (352) 378-1331

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