Unrelated Business Income Tax: A Continued IRS Focus

May 10, 2011

With the filing season approaching, tax-exempt organizations need to be aware of potential unrelated trade or business income tax (UBIT). The treatment of unrelated business income (UBI) by tax-exempt organizations is emerging as a significant IRS issue this year. In addition to undertaking a long-term study of colleges and universities that has uncovered varying treatment of UBI, IRS officials said they are taking a harder look at UBI in all tax-exempt contexts.

One of the major issues involves the claim of a loss deduction against UBI. This results in little or no taxable income from the unrelated business activity and the carry forward of net operating losses (NOLs) that are being applied to future UBI. The IRS is looking at why that type of activity generates a loss year after year. IRS’s concern is that losses from a specific activity are being used to offset other UBI, in some cases questioning whether there was ever intent for the activity to make any real profit. The IRS is also closely examining the deduction of indirect costs, such as depreciation of overhead that, in the case of universities, is turning UBI into a loss.

For further information on this issue and other UBIT concerns, see “New Scrutiny of College and University Executive Compensation and Unrelated Business Activity.”

McGuireWoods attorneys will keep you informed of these issues as they arise.

McGuireWoods Nonprofit & Tax-Exempt Organizations Group

Our nonprofit and tax-exempt services lawyers provide advice and guidance that enable charities and other nonprofits to operate efficiently and effectively in today’s increasingly complicated, regulated and competitive environment.

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Our higher education attorneys represent public and private colleges and universities. This representation includes statutory and regulatory compliance and investigation work relating to the Higher Education Act of 1965 and federal student aid programs. It also includes issues relating to NCAA investigations, faculty tenure, financing expansion, low income housing, 501(c)(3) and other tax issues, student lending compliance and investigations, intellectual property, students and academics, housing, governance, endowment management, and construction.

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