Are Private Nonprofit Colleges And Universities In Compliance With Unrelated Business Income Regulations?

Abstract

Nonprofit status is granted to entities organized for a charitable, educational, religious or scientific purpose. Nonprofits are not liable for income tax on their revenues as long as the revenues are related to their core mission. As colleges and universities struggle in an era of declining resources they often seek alternate streams of revenue; some of these look more like businesses and less like nonprofits. This created the question: are nonprofit colleges and universities complying with the unrelated business income (UBI) laws and regulations? The Internal Revenue Service (IRS) audited a sample of thirty-four college and universities and found that 90% of them were underreporting their UBI. UBI is income generated from any activity that is not related to a nonprofit institutionÕs core mission. Some examples of these activities are: selling clothing, receiving revenue from a fitness center, and offering sports camps over the summer. This study evaluated tax returns from a randomized sample of forty private higher education institutions to determine whether they were compliant with IRS regulations. Several data points were examined to assess the validity of the institution's income reported.