Unrelated Business Activities
Procedure Number: 5.3.16-P
Current Effective Date: 04/01/2018
Original Effective Date: 04/01/2018
Revision Dates: 04/01/2018
Revision Number: 1
Responsible Official: System Director of Treasury Management
To provide guidance on identifying unrelated business activities, in accordance with Internal Revenue Service regulations, and recording unrelated business income.
This procedure applies to all colleges and the System Office.
KCTCS is a tax exempt organization and, as such, is generally exempt from income tax. However, KCTCS is required to pay income tax on unrelated business income.
Each college Chief Business Officer and System Office designees are responsible for identifying unrelated business activities (see section 4) and for properly recording unrelated business income (see section 5).
4. Identifying Unrelated Business Activities
Unrelated business income (UBI) is income generated from an unrelated business activity.
An unrelated business activity is a trade or business activity that is regularly carried on which is not substantially related to the purpose for which the organization’s tax exemption was granted.
- The activity must meet each of the following three requirements to be deemed unrelated:
- The activity must be considered a trade or business.
- The activity must be regularly carried on.
- The activity must not be substantially related to the purpose for which the organization’s tax exemption was granted.
- If the activity meets all three requirements, it is deemedUBI unless it is excluded.
See section F for Exclusions.
- The IRS has specifically defined and provided examples of each of the three requirements. This information is included in sections C, D and E below.
- Trade or business - A trade or business is any activity carried on for the production
of income from the sale of goods or performance of services.
- The IRS has excluded from UBI activities that consistently produce losses.
- Regularly carried on - A trade or business is regularly carried on if it is conducted
in a similar frequency and continuity to that of comparable activities of a commercial
- Operation of a sandwich stand for 2 weeks at a state fair by a tax exempt entity would not be deemed “regularly carried on” because such commercial businesses normally operate throughout the year.
- Operation of a parking lot 1 day a week throughout the year by a tax exempt entity would be deemed “regularly carried on” because some commercial businesses do operate parking lots only 1 day a week.
- Income from holding an annual event by a tax exempt entity would not be deemed “regularly carried on”.
- Not substantially related - An activity is not substantially related if it does not
contribute importantly to the exempt purpose for which the organization operates.
- A tax exempt organization operates a school for performing arts. It derives income from ticket sales for student performances. The students’ participation in performances is an essential part of their training. Since the income realized from the performances contributes importantly to the accomplishment of the organization’s exempt purposes, it does not constitute unrelated business income.
- A tax exempt museum has a theater which is designed and equipped for showing educational films in connection with its program of public education in the arts and sciences. The theater is a principal feature of the museum and is in continuous operation during the hours the museum is open to the public. If the museum were to operate the theater as an ordinary theater for public entertainment during the evening hours when the museum was closed, income from such activity would be deemed unrelated.
- A tax exempt university sponsors the appearance of professional theater companies and symphony orchestras which present performances for the students and faculty members. Members of the general public are also admitted. The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. The presentation of the events contributes importantly to the overall educational and cultural function of the university. Therefore, the income received does not constitute unrelated business income.
- A tax exempt radio station operates for the purpose of advancement of public interest in classical music. The station derives income from the regular sale of advertising time to commercial advertisers. Neither the sale of such time nor the performance of such advertising services contributes importantly to the accomplishment of any purpose for which the organization is granted exemption, therefore, the income is deemed unrelated business income.
- A university provides facilities, instruction and faculty supervision for a campus newspaper operated by its students. In addition to news items, the newspaper publishes paid advertising. The solicitation, sale, and publication of the advertising are conducted by students, under the supervision and instruction of the university. Although the services rendered to advertisers are of a commercial character, the advertising business contributes importantly to the university’s educational program through the training of the students involved. Therefore, none of the income constitutes unrelated business income.
- Exclusions - The IRS specifically excludes certain types of income from taxation underUBI
regulations. Exclusions include:
- Dividends, interest, royalties.
- Rent from real property (facility/usage rental).
- Except when services are provided for the convenience of the occupant/renter. In such a case, rent from real property would be deemed UBI, and/or;
- Except when the value of personal property (equipment) rented as part of a mixed use rental agreement (one in which both real and personal property are rented together) is more than 50% of the total rent. In such a case, rent from both the personal and real property would be deemed UBI.
- Income from research (not applicable to KCTCS).
- Capital gains from the sale of property.
- Except for inventory held for resale.
- Income from activities provided for the convenience of students or employees.
- Income from activities carried out by volunteer labor.
- Income from sponsorship receipts.
- Sponsorship income is income from an activity with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit. Sponsorships may include an acknowledgement of the sponsor and may provide general information about the sponsor such as a sponsor’s address, phone number or website address. Sponsorships may not include messages containing qualitative or comparative language, price information or other indications of savings or value, an endorsement or an inducement to sell or use a company, service facility, or product.
5. Identifying & Recording Unrelated Business Activities
Income from unrelated business activities must be recorded in Fund 07.
Common types of UBI at KCTCS and proper account numbers for recording:
- Facility rental income where the college provides services primarily for the convenience
of the occupant/renter.
- Use account 44170 Facilities - Rental Income.
- Facility rental income in a mixed rental arrangement where the personal property/equipment
rental portion is more than 50% of the total rent.
- In this case, both the facility rental and personal property/equipment rental are UBI.
- Use account 44710 Facilities - Rental Income and 44160 - Equipment - Rental Income.
- Personal property/equipment rental income unless the equipment rental portion is 10%
or less than the total rent in a mixed rental agreement.
- In this case, the personal property/equipment rental income should be recorded in Fund 01.
- In all other cases, it is considered UBI and must be recorded in Fund 07. Use 44160 - Equipment - Rental Income.
- Cafeteria, grill and concession stand sales and related commissions are notUBI when
provided for the convenience of students, faculty and staff (record in Fund 01).
- If the cafeteria, grill or concession stand is located in an area where it is readily accessible by the general public, then, sales to the general public should be recorded in Fund 07.
- Use account numbers 43120, 43126, 43146, 43147 or 43148 for cafeteria, grill or concession stand sales.
- Catering/restaurant sales made to other organizations and the general public should
be recorded in Fund 07.
- If the work is performed primarily by students to give them experience as part of a culinary arts program, the income would not be UBI but would be recorded in Fund 01.
- Use account number 43149.
- Gift shop sales may beUBI if the item sold is not related to an educational purpose.
- For example, a souvenir could be deemed UBI and recorded in Fund 07 while a book related to an educational purpose may not be deemed UBI and recorded in Fund 01.
- Use 43196 - Sundry's - Non-Taxable or 43197 - Sundry's - Taxable, as applicable.