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
McGuireWoods attorneys will keep you informed of these issues as they arise.
McGuireWoods Nonprofit & Tax-Exempt Organizations Group
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.
McGuireWoods LLP Higher Education Practice
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