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First enacted by Congress in 1950 to eliminate unfair competition between tax-exempt and for-profit organizations, Unrelated Business Income Tax (UBIT) is defined as gross income your department earns from any unrelated trade or business that is regularly carried on at any point in time.
Taxes must be paid if all three criteria are met:
- Trade or business
- Regularly carried on
- Not substantially related to exempt purpose
Your departmental profits are not automatically tax exempt merely because they are destined for a charitable or tax-exempt purpose. For example, if your department or organization wants to sell T-shirts, the revenue from those sales are considered unrelated to UTSA’s educational mission and thus, are potentially taxable. Even if you intend to subsequently use that unrelated income for a related purpose, the IRS considers that income to be unrelated and subject to taxation.
Determine if Your Income Is Subject to UBIT
To determine if your income is subject to UBIT, your department must submit a non-financial questionnaire (NFQ) to Financial Services disclosing the details of the proposed income. After review by Financial Services, NFQs are submitted to UT System Office of General Counsel for official determination of taxability. Your objective is to show why the revenue should be considered related to UTSA’s mission and thus, exempt from taxation. Email Financial Services to request an NFQ.
Exclusions from UBIT
Certain types of revenue are excluded from UBIT:
- Interest, dividends and annuities
- Capital gains
- Royalties (payment for use of intangible property)
- Rent from real property (exception for service provided)
- Business conducted by volunteers
- Convenience of members (exception for sales to alumni)
- Sale of donated merchandise
- Qualified sponsorship payment (exception – advertising)
Expenses (direct and indirect) incurred as a result of activities conducted to earn the revenue should be tracked since we can reduce taxable income by those costs.
What Happens if Revenue Is Unrelated to UTSA’s Mission
If your department’s revenue is determined to be unrelated, any amount not excluded or exempted will become taxable at the current corporate tax rate.
Before you begin revenue generation that is unrelated to UTSA’s educational mission, contact UTSA’s Institutional Tax Coordinator (assistant vice president of Financial Affairs) to discuss NFQ requirements and potential taxability of proposed revenue streams.
For more information, see: