MINES’ POLICY LIBRARY
Policies and Procedures by Subject
Unrelated Business Income Tax (UBIT) Policy
Responsible Administrative Unit: Finance & Administration
Policy Contact: Controller (email@example.com)
1.0 BACKGROUND AND PURPOSE
The purpose of this policy is to ensure that the Colorado School of Mines (”Mines”) complies with all income tax regulations of the United States and State of Colorado. As a public institution of higher education in of the State of Colorado, Mines is considered “tax-exempt” from federal and state income taxes with regard to its non-profit primary purpose. The primary purpose of Mines is its educational mission: instruction; research; and public service in energy, mineral engineering, and mineral and materials science. Most of the activities conducted by Mines are related to its educational mission. However, it also conducts some business activities that are tangential to its core mission. Revenue generating business activities at Mines that are not substantially related to its tax-exempt educational mission subject it to income taxation by the state and federal government.
Recent IRS audits of institutions of higher education have challenged long-standing traditions of business activities previously categorized as related to the primary mission and exempt from unrelated business income taxation (UBIT). The IRS guidelines in this regard are unclear. Nonetheless, Mines will implement broad guidelines and be cognizant of its business activities in relation to this dynamic tax issue to ensure that those activities conform and that proper reporting to taxing agencies is taking place.
To ensure adherence to all federal and state regulations for income taxation, the Colorado School of Mines will evaluate all business activities and determine applicability to UBIT regulations. As an exempt higher education institution, Mines will report annually aggregated gross income in excess of $1,000 from unrelated business income (UBI).
3.1 Program manager: The individual designated as the responsible person for a business activity, program, or project.
3.2 “Regularly carried on”: Refers to the frequency and continuity of the business activity. Generally, “regularly carried on” means conducting the activity in a manner comparable to commercial activities; however, events that occur annually or seasonally may also constitute a trade or business regularly carried on.
3.3 “Substantially related to”: Generally refers to whether the activity contributes importantly to the accomplishment of Mines’ educational mission as it relates to its exemption from paying income tax. The activity of an exempt organization is related to its exempt purpose if the conduct of the business activity has “causal relationship to the achievement of exempt purposes” and the relationship is a “substantial relationship.” The intent is to exclude from taxation only income from those activities that further the exempt purposes of the organization. The need to obtain funds for other activities is not sufficient to make the income earning activity related to exempt purposes.
3.4 Unrelated business income (UBI): The net income (revenue less expense) from any activity that is not substantially related to the educational mission of CSM: instruction; research; and public service in energy, mineral engineering, and mineral and materials science, which constitutes the basis for Mines’ tax-exempt status.
3.5 Unrelated business income tax (UBIT): The tax assessed by the Internal Revenue Service for aggregated unrelated business income.
3.6 Unrelated trade or business: Any trade or business, the conduct of which is not substantially related to Mines’ tax-exempt educational mission.
4.0 PROCEDURES FOR DETERMINING WHETHER BUSINESS ACTIVITY IS SUBJECT TO UBIT
4.1 Complete UBIT Questionnaire: A questionnaire for UBIT determinations has been developed to provide assistance and documentation of campus activities. The questionnaire can be found in Appendix A.
4.2 Be aware of exceptions: There are certain activities that are exceptions and are considered UBI. Those exceptions include, but are not limited to, income from rent, and interest or dividends derived from property subject to acquisition indebtedness. Neither of these exceptions are excluded from UBIT. For example, rental income derived from a mortgaged building would be subject to UBIT unless the activity from which the rental income is derived is related to the entity’s exempt purposes.
4.3 Understand incomes not subject to UBIT: The Internal Revenue Code contains a list of certain types of incomes that are not subject to UBIT. Included, but not limited to, are dividends and interest payments, royalties, rental income from real property, capital gain and certain income received by a college, university or hospital from research activities.
5.1 Department responsibilities:
Program managers of existing and proposed activities shall review their particular operations for possible exposure to UBIT using this policy and the attached activity questionnaire. The questionnaire should be filled out no less than annually. Questionnaires are to be submitted to The Controller’s Office, Accounting Manager. Operations should not be terminated simply to avoid paying taxes. These programs must have proper pricing structures to allow for the cost of operations and the additional burden of the tax. Individual departments are responsible for both taxes, and interest and penalties incurred for failure to identify and report taxable activity.
5.2 Controller’s office responsibilities:
The Controller’s office will analyze campus revenue generating business activities and determine UBIT reporting status by business activity; aggregate income and expenses to determine taxable net income; and annually file IRS Form 990T.
6.0 APPENDIX A: UBIT QUESTIONNAIRE
See the PDF for the Unrelated Business Income Tax (UBIT) Policy:
REVIEW AND CYCLE HISTORY
Issued: December 2009