Unrelated Business Income

About Unrelated Business Income (UBI)

The University of Wisconsin System is tax-exempt both as a charitable educational organization and as an instrumentality of the State of Wisconsin. The University’s stated purpose is providing instruction, research, and public service. Public service, however, does not by itself provide the basis for the University’s tax exemption. Therefore, each activity which is public service oriented must be evaluated to determine whether an instructional or research purpose is also being served.

Three elements must be present for an activity to be considered unrelated to the University’s tax exempt purpose of instruction and research: (1) the activity must be a ‘trade or business’, (2) it must be ‘regularly carried on’, and (3) it must not contribute substantially to the University’s exempt purpose:

  1. Trade or Business – Generally, a trade or business for unrelated business income tax purpose is an activity which is carried on for the production of income from the sale of goods or performance of services [Reg. Sec. 1.513 1 (b)].
  2. Regularly Carried On – The unrelated business income tax applies only to a business activity which is regularly carried on as distinguished from commercial transactions which are sporadic or infrequent [Sec. 512 (a)(1)]. Short term activities are not ‘regular’ if a nonexempt business would conduct them on a year round basis. Intermittent, casual or sporadic activities are generally not regular. However, year round activities are regular even if they are conducted only one day a week. Seasonal activities conducted in season are also regular [Reg. 1.513 1(c)(2)].
  3. Not Substantially Related to Exempt Purpose – To be related to the University’s exempt purpose, there must be a substantial casual relationship, i.e., the activity must contribute importantly to the accomplishment of the exempt purpose. Particular emphasis is placed on the size and extent of the activity. Thus, if an activity is conducted on a scale larger than reasonably necessary to carry out the exempt purpose, it is more likely to be treated as unrelated [Reg. Sec. 1.513 1 (d)(2)].

There are, however, a number of modifications, exclusions, and exceptions to the general definition of unrelated business income.

The University of Wisconsin System Unrelated Business Income Review Guidelines (PDF) provides a full explanation of what qualifies.

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Decision tree

The decision tree document linked below is a tool departments may use to assist their analysis of current and new activity for potential unrelated business activities before reporting it to Tax Compliance and Reporting Office.

Decision Tree (PDF)

Examples of Unrelated Business Income (UBI)

  1. A university runs a pizza parlor that sells pizza to students and non-students alike. The university is a tax-exempt organization and its pizza parlor generates unrelated business income. While the tuition and fees generated by the university are tax exempt, its income from the pizza parlor is not tax-exempt because the pizza parlor is unrelated to the university’s education purpose.
  2. A counter-example is a social-service nonprofit that holds a one-time bake sale. While the sale is unrelated to their mission, it is tax-exempt because it is not regularly carried on. Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and they are pursued in a manner similar to comparable commercial activities of nonexempt organizations.
  3. If a nonprofit organization receives income from providing services to outside entities and the performance of those services does not further the organization’s mission, the income may be unrelated business income.
  4. If a nonprofit organization sells advertising in print or on the organization’s web site, the income is typically unrelated business income if the advertisements promote the advertiser’s business and not the nonprofit organization.
  5. If a nonprofit organization licenses its intangible property and promotes an outside entity’s business, the income may be unrelated business income. On the other hand, if the nonprofit organization licenses its intangible property and performs no other services related to the licensing, then the income is considered passive income and it is typically not unrelated business income.
  6. If a nonprofit organization has ownership in an S corporation, the income from the S corporation is typically unrelated business income. Gain or loss from the sale of stock in the S corporation stock is also typically unrelated business income.
  7. Under Internal Revenue Code section 514, property held for the production of income and subject to acquisition or improvement indebtedness is typically unrelated business income.
  8. In most of the above examples, the income may not be considered unrelated business income if the activity is not regularly carried on or if the organization does not intend to recognize a gain from the activity.

Exclusions from Unrelated Business Income (UBI)

  1. Certain types of income are not considered unrelated business income, such as income from dividends; interest; royalties; rental of real property; research for a federal, state, or local government; and charitable contributions, gifts, and grants.
  2. In addition, unrelated business income does not include income derived from the work of unpaid volunteers, income from the sale of donated goods, income from trade shows and conventions, and income from legal gaming.
  3. The Internal Revenue Service (IRS) does not consider the receipt of assets from a closely related tax-exempt organization to be unrelated business income.

If you have Unrelated Business Income (UBI)

It is the responsibility of all UW units/departments/divisions to read the guidelines on Unrelated Business Income (UBI) and determine if any of their activities constitute Unrelated Business Income (UBI) prior to engaging in any activity.

If you have Unrelated Business Income (UBI) you should immediately do the following:

  1. Complete the referenced Non-Financial Questionnaire (PDF).
  2. Submit the completed referenced Non-Financial Questionnaire to the UW-Madison Tax Compliance Office (José A. Carus, Jr., 608-262-05852, jose.carus@wisc.edu).
  3. The Tax Compliance Office review the completed referenced Non-Financial Questionnaire and will contact the unit/department/division to work with your unit/department/division to evaluate and report any activity that is Unrelated Business Income Tax (UBIT).



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21 N. Park Street
Madison, WI 53715

email iconJose A. Carus, Jr.
Tax Compliance Manager
Email: jose.carus@wisc.edu

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(608) 262-0582