Unrelated Business Income
What is Unrelated Business Income (UBI)?
Even though Dartmouth is tax-exempt, it still may be liable for tax on its unrelated business income (UBI). UBI is net income from unrelated trade or business activities. The term "unrelated trade or business" means any trade or business the conduct of which is not substantially related to the performance by the organization of its tax-exempt function. The fact that the exempt organization may need the income from a business for its program operations, or the way in which the organization uses the revenue derived from the business activity, does not cause the conduct of a business to be substantially related to an organization's exempt purpose.
Income would generally be subject to tax where the following three factors are present
- The income is from a trade or business.
- The trade or business is regularly carried on by the organization.
- The conduct of the trade or business is not substantially related to the performance by the institution of its tax-exempt functions.
What is a trade or business?
- It is any activity carried on to produce income from the sale of goods or performance of services.
What does it mean to be regularly carried on?
- It means that the exempt organization conducts the activity with the same frequency and continuity, and in a similar manner, as a for-profit organization would conduct a comparable activity.
What does not substantially related mean?
- Dartmouth's exempt purposes are education, research and campus life, so an activity whose purpose is not substantially related to one of those purposes would be characterized as unrelated. It is irrelevant that the proceeds from an activity are used to fund education research or campus life. The determining factor is the nature of the activity itself.
Exceptions for activities otherwise characterized as UBI
- Convenience Businesses - Revenue from an activity conducted primarily for the convenience of Dartmouth faculty, students or staff in connection with their respective roles is excluded from UBI.
- Research - In general, revenue received by Dartmouth from research is excluded from UBI. There are certain situations, however, that require further analysis to determine whether they fit within the research exception. For example, commercial research and development or testing services for a for-profit sponsor requires closer scrutiny to determine if the specific activity fits within the exception.
- Passive Investment Income (Such as interest, annuities, rents from real property and royalties) - In general, these types of income are excluded from UBI. However, they do become taxable in part or entirely, if:
- The annuity income is unrelated debt-financed income or is from a controlled corporation.
- Rental income where the organization provides services beyond normal maintenance services (furnishing of heat, air conditioning, power, trash collection and cleaning of public areas). If the organization provides services primarily for the convenience of the occupants (for example, supplying office cleaning services), the rent payments will generate UBI.
- The amount of rent payment is based on a percentage of the payer's profit or income.
- Qualified Sponsorship Payments - Any payment made in which there is no arrangement or expectation of any substantial return benefit other than the use or acknowledgment of the person's or business's name, logo or product line in connection with the activities of the organization receiving the payment. The following arrangements could violate the "substantial return benefit" exclusion:
- Advertising for which the aggregate fair market value exceeds 2% of the contribution. Advertising includes "messages containing qualitative or comparative language, price information or other indications of savings or value, an endorsement or an inducement to purchase, sell, or use the products or services."
- Exclusive sponsorships or exclusive provider of goods and services that limits the sale, distribution, availability, or use of products, services, or facilities that compete with the sponsor's products.
- Volunteer Workforce - Any activity in which substantially all the work is performed for the organization without compensation does not generate UBI.