Unrelated Business Income Tax (UBIT)

The IRS allows the University of Oklahoma Health Sciences Center (OUHSC), an exemption from Federal income taxes under Federal Internal Revenue Code Section 115(a) as an institution created by the State Legislature of Oklahoma. Income derived from engaging in activities that further OUHSC’s mission and purpose are exempt from federal income taxation, since those activities are substantially related to the purpose for which the University was granted exemption.  However, OUHSC is not exempt from federal income taxation on those activities that are “not substantially related” to the exempt purpose of the University, irrespective of whether the income is used to support or carry out the educational, research, or other functions or operations that constitute the basis for the University’s exempt status.  The OUHSC mission is to educate HSC students, not for profit research, and HSC patient care.

What criteria generates UBIT?

An activity must meet three tests in order to be classified as an unrelated trade or business.  It must be:

  1. A trade or business
  2. Regularly carried on, and
  3. Not substantially related to the institution’s exempt educational or scientific research purposes.

Any net income from such an activity is unrelated business income (UBI) subject to the unrelated business income tax (UBIT).  All unrelated business income activities must be reported on the University’s annual 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 Oklahoma Health Sciences Center 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 UBI exemptions

  1. Volunteer labor
  2. “Convenience Exception”: Provided for the convenience of students, patients, or employees
  3. Selling donated merchandise
  4. Rental of real property

The following are examples of activities and their UBIT treatment:

  1. Cafeteria open to OUHSC staff and students

    No UBIT because of the convenience exception
     
  2. Clinical testing of drugs for commercial pharmaceutical companies

    UBIT does apply. Testing serves the private interests of the drug manufacturer.
     
  3. Sales of products or services to entities external to OUHSC

    UBIT may apply if the activity does not otherwise contribute importantly to an exempt     purpose. Other factors may apply, please check with Auxiliary and Service Unit Accounting.
     
  4. Payment by a corporation for an advertisement in an OUHSC journal or publication

    UBIT may apply depending on a number of factors
     
  5. A qualified sponsorship payment where a corporation or 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 please contact Auxiliary and Service Unit Accounting at (405) 271-2246.
     
  6. Rental of real property where there are no services provided

    UBIT may apply if property is financed by debt
     
  7. Rental of real property where additional services are provided

    UBIT may apply depending upon 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 OUHSC’s mission each activity must be individually analyzed.

Performing the UBI 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 UBI may apply, Service Unit Accounting will work with your department to gather additional information and, if necessary, report the UBI on OUHSC’s tax return.

If a department suspects that an activity may generate unrelated business income or has any questions regarding unrelated business income, please contact: Stacey Risinger, Assistant Manager of Auxiliary and Service Unit Accounting at (405) 271-2246 X46333.