How to Calculate UBTI

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Calculate UBTI
Calculate UBTI (Image: freedigitalphotos.net)

Addressed in 1950 by the Internal Revenue Service, unrelated taxable income refers to that income received by a not-for-profit organization that's not directly related to its purpose. Income from the sale of football tickets and branded t-shirts might be examples of a public university's UBTI.

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Unrelated business taxable income consists of income generated from activities which are unrelated to the organization's mission. IRS Publication 598 defines unrelated business income as income related to a trade or business, regularly carried on, and not substantially related to furthering the exempt purpose of the organization.

Calculate taxable income. "Taxable Income" (TI) equals "Gross Income" (GI) minus "Cost of Goods Sold" (CGS), minus "Direct Costs" (DC), minus "Overhead Costs" (OC). The calculation is not difficult. However, the allocation methodology for direct and overhead costs is challenging. The equation is: TI = GI - CGS - DC - OC.

Allocate expenses for direct costs. These are expense directly associated with the UBI activity. This can be done on a net basis. If there are direct expenses only associated with UBI, these should be accounted for in aggregate here.

Allocate expenses for overhead costs. This can be done on a net UBI basis as well. If only a portion of overhead is going toward UBI projects, then only that portion should be expensed against UBI. The return as a whole may not even require a tax liability.

Calculate UBTI. Subtract Direct Costs (Step 3) and Overhead Costs (Step 4) from Gross Profit (Revenue - Cost of Goods Sold). Take the sum of all income and allocated expenses related to UBI. This is your UBTI. Taxable income = Gross Profit - Direct Costs - Overhead Costs.

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