ExpertMedium1 markMultiple Choice
CPA · Question 22 · Area II: Entity Tax Compliance
A §501(c)(3) tax-exempt university operates a coffee shop open to the public. The shop generates $50,000 in net income. The university also earns $100,000 in dividends from its endowment portfolio. Which of these items constitutes Unrelated Business Taxable Income (UBTI)?
A §501(c)(3) tax-exempt university operates a coffee shop open to the public. The shop generates $50,000 in net income. The university also earns $100,000 in dividends from its endowment portfolio. Which of these items constitutes Unrelated Business Taxable Income (UBTI)?
Answer options:
A.
Both the $50,000 and the $100,000.
B.
The $50,000 from the coffee shop only.
C.
The $100,000 from dividends only.
D.
Neither item.
How to approach this question
UBTI Test: 1. Trade or business? Yes. 2. Regularly carried on? Yes. 3. Substantially related to exempt purpose? No (coffee shop for public). Investment income (dividends, interest) is statutorily excluded.
Full Answer
B.The $50,000 from the coffee shop only.✓ Correct
IRC §512(b) specifically excludes dividends, interest, and annuities from UBTI. However, the operation of a coffee shop open to the public is a trade or business not substantially related to the educational purpose, making the $50,000 taxable as UBTI.
Common mistakes
Thinking all income of a non-profit is exempt, or that investment income is business income.
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