Unrelated Business Income
While colleges and universities are tax exempt organizations, they are still subject to tax on any unrelated business income they may generate. Generally, unrelated business income is income from a trade or business, that its regularly carried on, and that is not substantially related to the mission of the organization on which the organization's exempt status is based.
There are a number of statutory exceptions and exclusions from the unrelated business income tax (UBIT). For more information, see Publication 598, Tax on Unrelated Business Income for Exempt Organizations.
NACUBO Expense Allocation Methodology
During the mid-1990s, a task force of NACUBO chief business officers, tax directors, and cost accountants developed an alternative approach for calculating unrelated business income (UBI) for colleges and universities. Once the methodology was developed by the task force, it was reviewed by the membership, major accounting firms, and government officials from IRS, HHS, and OMB. It was then submitted to the Internal Revenue Service in the form of a draft revenue procedure. It was NACUBO's hope that the tool could serve as the groundwork for formal IRS guidance about acceptable methods colleges and universities may use to determine their unrelated business income.
While the IRS has not yet published guidance on this topic, many colleges and universities have found the NACUBO tool a useful way to allocate expenses for purposes of calculating UBI.
The NACUBO methodology is based on principles established in OMB Circular A-21. The two alternative methodologies set forth in the draft revenue procedure are intended to serve as safe harbor methods for determining UBI. The first method (Option 1) involves a three-tier cost allocation approach that could be utilized by institutions that are required to report indirect costs (referred to as facilities and administrative or F&A costs, beginning in 1996) using either the long- or short-form of A-21. Institutional examples are included.
The second method (Option 2) provides a simplified method for institutions that are not required to report research costs under OMB Circular A-21 or those that do not require the level of detail inherent in the three-tier method of calculation. Option 2 would be an alternative for all institutions electing to utilize it, whether or not the institution reports F&A costs using A-21. Option 2 provides separate calculations based on whether the institution is subject to the accounting standards of the Financial Accounting Standards Board (independent institutions of higher education) or the Governmental Accounting Standards Board (public colleges and universities).
- NACUBO Expense Allocation Methodology/Draft Revenue Procedure (submitted to IRS July 1997)
- Cover letter to IRS accompanying July 1997 submission
- NACUBO Background paper on Cost Identification and Allocation (included in the 1997 submission to IRS), written by John R. Shipley, Purdue University.
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January 25-26, 2016
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