What criteria generates UBIT?
An activity must meet three tests in order to be classified as an unrelated trade or business. It must be:
- A trade or business
- Regularly carried on, and
- Not substantially related to the institution's exempt educational or scientific research purposes.
Any net income from such an activity is unrelated business taxable income (UBIT) subject to the unrelated business income tax (UBIT), while losses from one unrelated business activity can offset income from other unrelated activities. All unrelated business income tax activities must be reported on the University's income tax return (Form 990-T).
Why understanding UBIT is critical
UBIT rules require a tax-exempt organization to pay income tax when the organization regularly carries on a trade or business that is not substantially related to the organization's exempt purposes. It is very important that all unrelated business activities of the University of Washington be reported on the Federal tax return. The Internal Revenue Service can and will assess steep penalties and interest charges for underpayment of taxes.
Common UBIT generating activities
- Income from investments in certain pass-through entities (i.e. partnerships)
- Selling goods or services that are unrelated to UW's mission
- Testing or other commercial activities on behalf of a private company
Common UBIT exemptions
- Volunteer labor
- "Convenience Exception": Provided for the convenience of students, patients, or employees
- Selling donated merchandise
- Rental of real property
The following are examples of activities and their UBIT treatment:
- Cafeteria open to University of Washington staff and students
- No UBIT due to the convenience exception
- Book store sales of items related to the University's exempt purpose located in a convenient area
- Convenience of employees and students
- UW opens a furniture store in downtown Seattle
- UBIT may apply if the activity does not otherwise contribute importantly to an exempt purpose
- Income from an athletic event
- Intercollegiate athletics are considered substantially related to UW's exempt purpose
- Payment by a corporation for an advertisement in a UW journal or publication
- UBIT may apply depending on a number of factors
- A qualified sponsorship payment where a corporation or a business makes a payment to the University in return for some mention or acknowledgment of the business's products or services
- Qualified sponsorship payments are not subject to UBIT. However, there are complex rules regarding whether a sponsor is providing a corporate sponsorship or purchasing taxable advertising. If you believe you may have a qualified sponsorship payment
- Rental of real property where there are no services provided
- UBIT may apply if property is financed by debt
- Rental of real property where additional services are provided
- UBIT may apply depending on the level of services provided
How to report UBIT and UBIT losses
Departments should evaluate all sales and service activity that occurs within their unit to determine if potential unrelated business income activity may exist. While the vast majority of external selling activities that take place on campus are directly related to the UW's mission per the UW policy on Sales of Goods and Services, each activity must be individually analyzed.
Performing the UBIT analysis requires significant review of specific facts to properly determine whether or not an activity may generate unrelated business income or whether a particular exception applies. If the responses to the questionnaire indicate UBIT may apply, the Tax Office will work with your department to gather additional information and, if necessary, report the UBI on UW's tax return.
f a department suspects that an activity may generate unrelated business income or has any questions regarding unrelated business income, please contact:
Private Business Use
Many activities that may generate UBIT can also generate Private Business Use (PBU) if conducted in a facility financed with tax-exempt bonds. For questions regarding private business use, please contact:
Associate Treasurer, Asset Liability Management