University of Illinois System
Policies & Procedures

18.13 Unrelated Business Income Tax (UBIT)

Note: This policy is intended for the purpose of informing University of Illinois System employees and other system-related individuals about relevant tax issues. This policy does not constitute legal or tax advice. Individuals should consult with their attorneys or tax professionals for advice on personal issues.

Overview

A tax on Unrelated Business Income (UBI) is assessed by the IRS to organizations that engage in business activities that are not related to the organization's tax exempt purpose. The University of Illinois System is an instrumentality of the State of Illinois and, as such, its income is exempt from federal income tax under the provisions of Internal Revenue Code (IRC) §115. In addition, the Internal Revenue Service (IRS) has recognized the system as exempt from federal income tax as an organization described in IRC §501(c)(3) and as a public charity of the type described in IRC §§501(a)(1) and 170(b)(1)(A)(ii). The system's IRS Exemption Letter confirms the system's exempt status. The system is not, however, exempt from income tax imposed by IRC 511 and defined and described by IRC §§ 512 - 514 on unrelated trade or business activities.

Operational

Departments need to contact the Office of Treasury Operations, Tax Compliance & Analysis (TCA) if questions arise when determining if an activity is deemed an activity that generates unrelated business income (UBI). See also the unrelated business income tax (UBIT) questionnaire information below. Departments need to contact University Accounting and Financial Reporting (UAFR) when new unrelated business income activities commence. Your unit's business office provides UAFR with new revenue generating contracts when potential UBI activities may be present.

UAFR contacts all affected departments on an annual basis (shortly after the fiscal year-end) with a schedule (see sample templates) indicating the due dates for departments to provide the required financial information for tax reporting purposes. Contact UAFR at 217-333-4568 for the most current templates.

Departments generating UBI may be charged Federal and Illinois state tax. See Filing Requirements and Rates information below.

Unrelated Business Income Tax (UBIT) Questionnaire

The UBIT questionnaire should be completed and returned to TCA to determine if activities are subject to UBIT and any potential tax liabilities prior to the start of the activity. However, classification as an unrelated business activity does not constitute grounds for withholding approval of an activity.

Unrelated Business Income Tax (UBIT)

For an activity to be considered an unrelated trade or business activity, all of the following criteria must be satisfied:

  1. the activity must be a "trade or business",
  2. the activity must be regularly carried on, and
  3. the activity must not be substantially related (in other words, must be unrelated) to any IRC §501(c)(3) purpose.

Federal and state income tax is imposed on the system's unrelated business income (UBI). This tax is commonly referred to as unrelated business income tax.

Trade or Business

The term "trade or business" generally includes any activity carried on for the production of income from selling goods or performing services. A trade or business activity is one in which an organization is expected to derive a profit. However, where an activity that is carried on for a profit constitutes an unrelated trade or business, no part of the trade or business is excluded from the for profit classification merely because it does not result in a profit in a particular year.

Regularly Carried On

Business activities ordinarily are considered regularly carried on if such activities show a frequency and continuity and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Generally, income production or fundraising activities lasting only a short period of time conducted on an annual basis are not considered regularly carried on.

Not Substantially Related to Exempt Purposes

Activities that are substantially related to an IRC §501(c)(3) purpose are not subject to UBIT. Activities that are not substantially related to an IRC §501(c)(3) purpose may be subject to UBIT.

The following are considered IRC §501(c)(3) purposes: charitable, religious, educational, scientific, literary, and the prevention of cruelty to children or animals.

The conduct of a trade or business is not substantially related to an IRC §501(c)(3) purpose solely because the system may need (1) the income derived from the business or (2) to use the profits for exempt purposes.

Ordinarily, selling products that result from the performance of the system's exempt activities is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt activities are completed. Also, the size and extent of business activities must be considered when determining whether the activities are substantially related. If the activities are conducted on a larger scale and more extensive than reasonably necessary for the performance of the exempt purposes, the activities are considered unrelated. Moreover, an activity does not lose its identity as a trade or business merely because it is carried on within a larger group of similar activities that may, or may not, be related to the system's exempt purposes.

Statutory Exceptions and Modifications

Federal tax law provides exceptions to the above rules for certain activities and modifications for certain types of income. The exceptions and modifications are summarized below, and examples of the application of these special rules are covered in the following sub-sections.

Exceptions

IRC §513(a)(1) and Federal Treasury Regulation (Treas. Reg.) §1.513-1(e)(1) exclude the following activities from the definition of unrelated trade or business:

  • Convenience of members, students, patients, officers, or employees - IRC §513(a)(2) and Treas. Reg. §1.513-1(e)(2) provide that any trade or business carried on by a college or university primarily for the convenience of its members, students, patients, officers or employees is not an unrelated trade or business. The convenience exception does not apply to alumni or spouses, children, and guests of employees.
  • Volunteer labor - An unrelated trade or business does not include any trade or business in which substantially all the work is performed for the organization without compensation.
  • Donated merchandise - IRC §513(a)(3) and Treas. Reg. §1.513-1(e)(3) exclude from the definition of unrelated trade or business any trade or business which consists of selling merchandise where substantially all of the merchandise has been received by the organization as gifts or contributions.

Modifications

Under IRC §512(b), dividends, interest, annuities, royalties, and gains or losses from selling or exchanging property other than inventory, as well as the deductions directly connected with these types of income, are not included in the UBI computation. Also, rental income from real property and incidental rent from personal property are not included in UBI. However, two exceptions exist:

  • Income from Controlled Entities - Part or all of the interest, royalties, rent, or annuities derived from a controlled organization is included in computing UBIT. For additional information, see IRC §512(b)(13).
  • Debt Financed UBI - IRC §514 treats dividends, interest, annuities, royalties, rent income, and gains or losses as UBI if it is acquired with borrowed funds. This net income is treated as UBI in the same ratio as the ratio of debt to the cost of the asset used in the activity. (See Debt Financed Unrelated Business Income below for more details.)

Special Rules for Certain Activities

Rental Income

School Facilities - The lease of system facilities for a fixed periodic fee or a fee that is a percentage of gross income derived from the leased property is rent from real property and, therefore, not UBI. However, leasing of property for a fee that is based on a percent of net income or profit is UBI. The leasing of facilities for activities that are part of the system's exempt purposes is exempt as well. Examples of activities that are part of the system's exempt purposes include dormitories, student, staff and faculty parking lots, and the lease of office or research facilities to faculty, staff, or students.

Services Provided with Lease - The payment for the use or occupancy of rooms or other space where services are also rendered to the occupant does not constitute rent from real property. Therefore, income from transactions such as the use of hotel rooms or apartments furnishing hotel services is UBI. Other examples of uses involving services and considered UBI include office suites with substantial services and lease of sports facilities such as football stadium, basketball facilities and tennis courts.

Mixed Leases - In a lease that includes both real property and personal property (mixed lease), all of the rents are UBI if the rents attributable to the personal property are more than 50% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the personal property are UBI. If the rents attributable to the personal property are not more than 10% of the total rents, none of the rents are considered UBI.

Parking Facilities - Income from system owned parking facilities used by faculty, staff, and employees is not UBI. However, if the system operates a parking facility that is used by members of the general public, parking fees are taxable, as this activity is not substantially related to the system's exempt purpose, and parking fees are not treated as rent from real property. If the system enters into a lease with a third party who operates the system's parking facility and pays fixed rent to the system, such payments are not considered UBI, as these payments constitute rent from real property.

Debt Financed Unrelated Business Income - See Debt Financed Unrelated Business Income below for more details.

Broadcasting Rights - An athletic program is considered an integral part of a university's educational aspect. The educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience is substantially similar. Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose, and the sale of the exclusive broadcasting rights is not an unrelated trade or business.

Hospital Facilities

Facility Rental - The leasing of an adjacent office building and furnishing of certain office services by the system hospital to a hospital-based medical group for a fee is related to the hospital's exempt purpose and not an unrelated business activity. Similarly, the revenue generated when the hospital leases space within the hospital to a group which provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis is related to the hospital's exempt purposes.

Gift Shop - When a hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only, the hospital is furthering its exempt purposes.

Theater and Entertainment Activities

Presentation of performing arts, such as acting, singing, and dancing by students even where the system derives gross income from admission charges for the performances, is not an unrelated activity. The students' participation in performances before audiences is an essential part of their training. Since the income realized from the performances derives from activities which contribute importantly to the system's exempt purposes, it does not constitute gross income from unrelated trade or business activities.

When the system sponsors the appearance of professional theater companies and symphony orchestras, which present drama and musical performances for students, faculty members, and the general public, such activities may also be related. Although the system derives gross income from the conduct of such performances, the presentation of the performances makes use of an intangible generated by the system's exempt educational purposes. The presence of the student body and faculty and the presentation of such drama and music events contribute importantly to the system's overall educational and cultural purposes. Therefore, the income that the system receives does not constitute gross income from the conduct of an unrelated trade or business activity.

The IRS determines whether the income derived from professional entertainment events is considered UBI by looking at how the event was conducted, not the content of the event. The IRS does not look at the cultural nature of the event, but looks at each entertainment event separately and makes its determination as to whether the activity is related or unrelated based on the extent to which it is operated in substantially the same manner as a commercial operation. The IRS's decision of whether income derived from professional entertainment events is considered UBI is based upon the facts and circumstances of each situation. Therefore, each event needs to be reviewed separately to determine several variables, including, but not limited to, the involvement of students/faculty, if the event was conducted in a commercial manner, and if the event contributes importantly to the system's missions.

Retail Sales

In general, the operation of a general book and supply store on the system's campuses for the convenience of the student body, faculty, and employees is exempt from UBIT because it is in furtherance of the system's educational mission. The convenience exception does not apply to alumni or spouses, children, and guests of employees. Items that are directly related to the system's educational purposes are exempt when sold to students, faculty and other employees. This includes books and general school supplies.

However, not all sales at the system's bookstores are necessarily considered related or do not necessarily fall within the convenience exception under IRC §513(a)(2) which provides that an activity carried on by a university, primarily for the convenience of its students or employees is not taxable as an unrelated trade or business.

Sales of non-educational items that are low in cost and in recurrent demand are exempt as sales for the convenience of students, and employees of the system. Examples of merchandise that may be exempt under this convenience exception include toiletry articles, various health and beauty aids, wearing apparel or novelty items bearing the system's insignia, and other items such as candy, magazines, and greeting cards.

In the absence of clearly established special circumstances, items not directly related to the system's exempt purposes that have an ordinary useful life of more than one year are not encompassed by the exception.

Where bookstores are open for sales to the general public, sales to the general public are not related to the system's exempt purposes and clearly do not fall within the convenience exception. Each item sold by the bookstore must be considered individually along with identifying the purchaser to determine which sales are includible as UBI.

Online and Catalog Sales

Online and catalog sales are generally subject to tax. However, online and catalog sales of items directly related to educational purposes are not subject to UBIT. An example of a sale of an educational item not subject to UBIT includes one computer per year to a student, faculty, or staff member.

Sales that are normally not included in UBI under the convenience exception are only exempt from UBIT when the system tracks the sale to a student, faculty, or staff member.

Food and Catering Activities

Food service activities open to the general public are not related to the system's exempt purposes and are generally considered unrelated business activities. However, there are exceptions based on where the activity takes place and other activities being carried on at the same time and place.

Food service at system exempt activity where the food is generally only available to ticket holders is exempt. An example of this includes food served at Memorial Stadium, the State Farm Center, or the Pavilion during a university athletic or other related system event. However, if non-university events, such as professional football or basketball games, take place at those locations, the food services are considered unrelated business activities.

The same holds true at non-athletic facilities. Food services at facilities that are only accessible from some closed or restricted areas at a museum or gallery, but not directly accessible from the street are considered related to the other areas it serves and the exempt activities carried on in those facilities. Patronage of the eating facility by the general public is neither directly or indirectly solicited nor is the facility contemplated or designed to serve as a public restaurant but merely to serve the exempt purposes of the museum. The Illini Union at the Urbana-Champaign Campus offers food services that are not directly accessible from the street and patronage by the general public is not directly or indirectly solicited. Use by students, faculty, staff and faculty is exempt from UBI as a convenience to them. Casual and intermittent use by members of the general public does not constitute a business activity regularly carried on in a commercial manner; therefore, this activity is not considered UBI.

Catering services to non-system customers constitute unrelated business income. In situations where the system has excess capacity in its food service program and the food service unit provides catering services to both system and non-system users, catering services provided to system student, faculty, and staff is related and not considered UBI.

Advertising Activities

Commercial advertising sold by the system in publications and athletic programs, as well as arrangements for corporate sponsorship of system programs and activities, may be considered UBI.

Generally, advertising in a system periodical is regarded as an unrelated business activity, even if the publication of the editorial content of the periodical furthers the system's exempt purposes.

In situations where the system publishes a periodical with professional staff and the periodical contains advertising, income from advertising less the costs associated with the part of the periodical containing advertising is considered UBI. When the system contracts with an outside publisher to publish the periodical, the advertising portion of the publication is also UBI if the system is an active participant in the publication of the periodical.

Event Advertising - Advertising at an event (for example, an athletic or artistic event) carried on in a system facility or in a program or other written document distributed at such event is explored more fully in the "Sponsorship Payments" rules below.

Sponsorship Payments

UBI does not include the activity of soliciting and receiving "qualified sponsorship payments." A qualified sponsorship payment is any payment to a tax-exempt organization by a person engaged in a trade or business where there is no arrangement or expectation of any substantial return benefit by the payor (other than the use or acknowledgement of that person's name, logo, or product lines in connection with the activities of the tax-exempt organization.)

The term "use or acknowledgement" includes logos and slogans that do not contain qualitative or comparative descriptions of the payor's products or services. This includes value-neutral descriptions of the payor's product-line or services, a list of the payor's locations, telephone numbers, or Internet address, and the payor's brand or trade names and product or service listings. "The University of Illinois System is proud to have X as our sponsor" is a statement of recognition. The term "advertising" includes qualitative language (price information, savings), endorsements, or comparative language (savings or value or better) or an inducement to purchase, sell, or use goods and/or services-a call to action. "The University of Illinois System suggests that you buy from X" is advertising.

The display or sale of the sponsor's product by the sponsor or the system at a sponsored event, is not considered an inducement to buy, sell, or use the sponsor's product and does not affect the determination of whether a payment is a qualified sponsorship payment.

Acknowledgement of an exclusive sponsorship of the system's activity generally does not, by itself, result in a substantial return benefit. However, if the system agrees to perform substantial services in connection with the exclusive provider arrangement, income received by the system may be included in UBI. Examples of substantial services include guaranteeing that coaches make promotional appearances on behalf of the company (for example, to attend photo shoots, to film commercials, and to appear at retail stores), assisting the company in developing marketing plans, and participating in joint promotional opportunities. These activities are unlikely to be substantially related to the system's exempt purposes and are likely to constitute a regularly carried on trade or business.

The term "qualified sponsorship payment" does not include a payment which is contingent upon the level of attendance, broadcast ratings, or other factors indicating the degree of public exposure to the sponsored activity.

If the sponsor receives substantial return benefits, the unit must limit the amount of the benefit provided to a value equal to or less than the amount of the sponsor’s payment to the system. In accordance with Article VIII of the Constitution of the State of Illinois, the system is prohibited from providing a sponsor benefits that exceed the value of the sponsor’s payment. For additional information, including the procedure on how to properly account for sponsorships in Banner, see Section 11.13, Sponsorships Gifts.

Recreational Activities - In most cases the use of athletic or recreational facilities by the general public that is regularly carried on constitutes an unrelated business activity.

However, where the system does more than merely open the facilities and, for instance, provides lessons as well, the activity can be considered educational and related to the system's exempt purposes. Generally, the operation of a summer sports camp provides instruction to individuals in a sports skill. The instruction of individuals, of any age, in a sport develops that person's capabilities and is, therefore, educational. Since the operation of a summer sports camp in this situation is an educational activity, it is substantially related to the system's exempt purposes.

Lessening the Burdens of Government

In defining a charitable activity, Reg. §1.501(c)(3)-1(d)(2) includes "lessening the burdens of government" as a charitable activity. Any conduct of an activity by the system that another governmental unit considers its essential governmental purpose is a charitable activity. Therefore, any activity provided to another state governmental entity is considered a related business activity because the system is an arm of the state. For example, the system considers the system's operation of a commercial airport as an example of an activity that is exempt from UBI under this exception.

Charitable Organizations exempt under IRC §501(c)(3)

It is the practice of the system to treat activities carried on for or with IRC §501(c)(3) organizations as related to the system's exempt purposes and not an unrelated business activity if the purpose of the activity furthers the system’s missions. The department needs to request and maintain documentation of the IRC §501(c)(3) organization's exempt status.

Income from Research

Research can be exempt from UBIT if it falls under one of the following categories:

  • Scientific research-must meet the following three tests:
    • Scientific research includes practical and applied research, as well as fundamental or theoretical and professional skill is involved to solve a problem or search for demonstrable truth, and
    • Scientific research must not be conducted incident to commercial or industrial operations, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment or buildings, and
    • Research must be carried on in the public interest; the results of such research must be freely available to the general public. A determination that the research is conducted in the public interest and research results made available to the general public includes an analysis of how, when and on what terms research results are published. Scientific research is considered in the public interest even though an individual may retain the exclusive right to the use of a patent, copyright, process, or formula if the granting of such exclusive right is the only practical manner in which the patent, copyright, process, or formula can be utilized to benefit the public, and only if it is carried on for a charitable purpose such as aiding in the scientific education of college or university students, or
  • Research performed for the United States, its agencies, or any State or political subdivision of a state, or
  • Research performed "for any person" by a college, university, or hospital. The term "research" does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment or buildings.

In General Counsel Memorandum 39196 (August 31, 1983), the IRS has defined testing as those activities where "a standard procedure is used, no intellectual questions are posed, the work is routine and repetitive and the procedure is merely a matter of quality control." Rev. Rul. 68-373, 1968-2 C.B. 206 includes a presumption that a project is "ordinary testing" if the work is performed to satisfy a federal or state regulation requiring such an evaluation before a product may be marketed.

Therefore, any income from such ordinary testing would constitute UBI, if the activity is regularly carried on.

Significant involvement of students in research activity demonstrates the primary educational purpose of the activity, and the research is treated as related to system's tax exempt mission (i.e., not subject to UBIT).

Each research activity is fact and circumstance specific and should be evaluated on an individual basis to determine if subject to UBIT.

Investments

IRC §512 requires income from investments in certain pass-through entities to be reported as UBI. Under IRC §512(c)(1) the system is required to report UBI and deductions as reported by partnerships. Additionally, IRC §512(e)(1) provides that the system is required to report as UBI all income from S corporation investments, including any gain or loss on the sale of stock.

Debt Financed Unrelated Business Income

IRC §514 treats income from property held to produce income as UBI if the property is acquired with borrowed funds. Therefore, dividends, interest, annuities, royalties or rental income that is otherwise excludible under IRC §512(b) (see "Statutory Exceptions and Modifications" above) is UBI if the income is derived from property that is subject to acquisition indebtedness. The UBI (after expenses) is includible in the same ratio as the acquisition debt to the adjusted cost basis of the asset used in the activity.

Dividends, interest, annuities, royalties, or rental income that is treated as UBI under some other provision remains subject to the rules of that other provision and not the special rules of IRC §514.

Special Rules

Acquisition indebtedness is debt that has been incurred or anticipated on the acquisition of or on substantial improvement of the property.

Real property debts of educational organizations are not acquisition indebtedness unless the debt is to be repaid by income derived from the property.

Property used in research activities is not treated as debt-financed property when it produces income that is otherwise exempt from UBIT.

Property used at least 85% of the time for exempt activities is not debt financed property. If less than 85% of the use is for exempt activities, only the unrelated use is considered debt financed use.

Property used by a related exempt organization is not debt financed property to the extent the property is used for exempt activities of the related organization.

Real property is not debt financed when rented to a medical clinic that is operated in furtherance of the system's exempt purposes.

Real property acquired with the intention of using it for exempt purposes within ten years and that is contiguous with or located very close to the system's current property is not debt financed property. This is known as the Neighborhood Land Rule. This rule only applies if the intention to use the property for exempt purposes is not abandoned prior to the end of the ten year period.

Allowable expenses must be directly connected to the debt financed property or income from it. Depreciation, if allowable, must be computed using the straight-line method.

Miscellaneous Information

Disregarded Entities

Activities of disregarded entities are considered activities of the system for purposes of determining the system's UBIT liability for any year. Currently IllinoisVENTURES, LLC, University of Illinois Research Park, LLC, and UI Singapore Research, LLC are treated as single member disregarded entities. If any of these entities were to begin reporting its activities separately, that entity would be required to report any unrelated business activity on their own tax return. The exception for research activities by any college or university would not be available. For research activities to be exempt when reporting separately, one of the other exceptions listed above would need to apply.

Allowable Deductions

Only expenses that are directly related and for the primary purpose of carrying on the unrelated trade or business are allowed as deductions in computing unrelated business taxable income.

Expenses, depreciation, and similar items attributable solely to the conduct of the unrelated business may qualify for deduction. When facilities or personnel are used both to carry on exempt activities and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. The part of an item allocated to the unrelated trade or business is then allowable as a deduction in computing unrelated business taxable income, if the expense is otherwise an allowable income tax deduction.

Filing Requirements and Rates

Federal

The system annually files Form 990-T , Exempt Organization Business Income Tax Return to report UBI generated by the system. The corporate tax rate as of July 1, 2018 is 21%.

Because the system's year-end is June 30th, the system's Form 990-T is due by November 15th. If the regular due date falls on a Saturday, Sunday, or legal holiday, the return must be filed on the next business day. The system may request an automatic six (6) month extension of time to file Form 990-T by filing Form 8868, Application For Extension of Time to file an Exempt Organization Return . This extension of time to file the Form 990-T is not an extension of time to pay any tax that may be due. The due date with the extension is May 15th. Federal net operating losses can be carried forward indefinitely. See Instructions for Form 990-T and Publication 536 for additional information.

The system is required to make estimated payments to the IRS. The due dates are October 15th, December 15th, March 15th, and June 15th.

State

Since the system is required to file the Federal Form 990-T, it is also required to file Form IL-990-T, Illinois Exempt Organization Income and Replacement Tax Return (regardless of net income or loss) with the Illinois Department of Revenue (IDOR). Illinois UBI is currently taxed as follows:

The system's Form IL-990-T is also due on November 15th. The IDOR grants an automatic seven (7) month extension of time to file the Form IL-990-T, or until June 15th. No request for this extension is required. An extension of time to file Form IL-990-T is not an extension of time for payment of Illinois tax.

The system is required to make estimated payments to the IDOR. The due dates are October 15th, December 15th, March 15th, and June 15th.

Additional Resources

Helpful resources are located at:

Units may contact Tax Compliance and Analysis 217-244-8359; or UAFR 217-333-4568, with questions.

Last Updated: June 2025 | Approved: Senior Associate Vice President for Business and Finance | Effective: November 2011