University Corporation for
Atmospheric Research
Finance & Administration
Even though an organization is recognized as tax exempt, it may be liable for tax on its unrelated business taxable income. An exempt organization that earns $1,000 or more of gross income in unrelated business income must file Form 990-T, Exempt Organization Business Income Tax Return with the Internal Revenue Service.
Unrelated Business Income:
Unrelated business income is the income from a trade or business that is regularly carried on by an exempt organization and that is not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.
IRS Definition of Substantially Related:
“To determine if a business activity is substantially related requires examining the relationship between the activities that generate income and the accomplishment of the organization's exempt purpose. Trade or business is related to exempt purposes, in the statutory sense, only when the conduct of the business activities has [a] causal relationship to achieving exempt purposes (other than through the production of income). The causal relationship must be substantial. The activities that generate the income must contribute importantly to accomplishing the organization's exempt purposes to be substantially related.”
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. 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 exempt purposes of the organization.
Regularly Carried On:
Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of non-exempt organizations.
Not Substantially Related:
A business activity is not substantially related to an organization’s exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). Whether the activity contributes importantly depends in each case on the facts involved and a lab/division/program should contact the Project Accounting Manger as to whether your activity is substantially related.
Once it has been determined by the Project Accounting Manager that an activity is not substantially related to the exempt purpose of UCAR, the lab/division/program is required to setup a separate account key that tracks both the revenue and expense related to this activity. These costs will be used to prepare the 990-T tax form and all taxes associated with the activity will be posted to that key.
Exceptions:
The investment income of non-profit organizations generally is not taxed if it is set aside to be used for the organization’s mission related to their non-profit status.
At UCAR, current examples of UBI revenues are some Event Services and Image and Design Center (IDC) activities.
Both departments have designated account keys that collect the revenue and expenditures relating to UBI.
Event Services:
UCAR rents facilities and provides catering services for employee personal events, other non-profit and government agencies, and local businesses and organizations. Meetings relating to UCAR’s mission and those held by other non-profits and government agencies are exempt from UBIT.
Image & Design (IDC):
IDC provides printing and design services for employee personal events which are subject to UBI. Services provided to other non-profit and government agencies or local businesses and organizations would be determined on a case by case basis.
Tax Preparation:
Project Accounting staff have responsibility for preparing and calculating UBI as part of the IRS Form 990-T. The 990T is signed by an officer of UCAR. The account keys designated as UBI will be charged with the tax.
For additional information on Tax on Unrelated Business Income of Exempt Organizations, see IRS Publication 598.
Issued 7/2007