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Chrissy Moffatt, Director, Taxation and Accounts PayableAshley Raimondo, Tax Analyst

August 1, 2018

Unrelated Business Income Tax and Private Business Use Discussion

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• Introductions

• Learning Objectives

• Unrelated Business Income Tax

• Private Business Use

• Annual Survey Q&A

Agenda

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• To gain a general understanding of Unrelated Business Income and Private Business Use

• To be able to identify potential activities that could generate Unrelated Business Taxable Income, and/or be considered Private Business Use

• To understand the effects of Tax Reform on Unrelated Business Income

• To understand and be able to accurately complete the annual survey

• To know what actions to take when potential activities are identified

Learning Objectives

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VisionCarnegie Mellon University will have a transformative impact on society through continual innovation in education, research, creativity, and entrepreneurship.

MissionTo create a transformative educational experience for students focused on deep disciplinary knowledge; problem solving; leadership, communication, and interpersonal skills; and personal health and well-being.

To cultivate a transformative university community committed to (a) attracting and retaining diverse, world-class talent; (b) creating a collaborative environment open to the free exchange of ideas, where research, creativity, innovation, and entrepreneurship can flourish; and (c) ensuring individuals can achieve their full potential.

To impact society in a transformative way — regionally, nationally, and globally — by engaging with partners outside the traditional borders of the university campus.

CMU’s Vision and Mission Statement

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Ashley RaimondoTax Analyst

Unrelated Business Income Tax

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• What is Unrelated Business Income?

• Exclusions from UBI

• Deductions

• 2017 Tax Reform

• UBI Examples

AgendaUnrelated Business Income Tax

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Income from a trade or business regularly conducted

by an exempt organization and not substantially

related to the performance by the organization of its

exempt purpose or function.

What is Unrelated Business Income?Unrelated Business Income Tax

Trade or Business

Regularly Conducted

Not Substantially Related

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What is Unrelated Business Income?Unrelated Business Income Tax

Trade or Business

• Any activity conducted for the production of income from selling goods or performing services.

• Must exhibit intent to profit from the activity.

• If fees charged are substantially below the cost of its goods or services, the activity is not a trade or

business. If the business is conducted in a competitive manner, then this demonstrates a profit motive.

Regularly Conducted

• Must show a frequency and continuity, and is pursued in a manner similar to comparable commercial

activities of nonexempt organizations.

• Activity should not be considered regularly conducted if it is on a very infrequent basis, or for a short

period of time.

Not Substantially Related

• Activity must contribute importantly to accomplish the university’s exempt purpose. Whether an activity

contributes importantly depends in each case on the facts involved.

• In determining whether activities contribute importantly, consider the size and extent of the activity.

• To the extent an activity is conducted on a scale larger than is necessary to perform an exempt purpose,

then that activity does not contribute importantly to the accomplishment of the exempt purpose.

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• Volunteer Workforce

• Convenience of Members

• Selling Donated Merchandise

• Qualified Sponsorship

Exclusions from Unrelated Business ActivitiesUnrelated Business Income Tax

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• No substantial benefit received through sponsorship

• Use or acknowledgment of the business name

• Use of logo

• Cannot provide advertising

Exclusions: Qualified SponsorshipUnrelated Business Income Tax

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To qualify as allowable deductions in computing UBTI,

the expenses, depreciation, and similar items must be

allowable income tax deductions.

DeductionsUnrelated Business Income Tax

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Tax Cuts and Jobs Act of 2017

• Qualified Transportation Benefits are now considered UBI if offered to employees

on a tax-free basis (i.e., PAT bus passes and pre-tax parking).

• UBI Income can be offset only with expenses that are directly connected to that

specific activity (siloing).

• Previously expenses from all sources of UBI could be net against income from all UBI sources.

• Profitable UBI activities will generate a tax liability.

• Corporate Tax rate reduced to a flat 21% rate.

• Net Operating Loss (NOL) can be used to offset net income up to 80%.

2017 Tax ReformUnrelated Business Income Tax

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UBI ExamplesUnrelated Business Income Tax

Investment Income from Alternative Investments

Catering Activities

Parking

Transportation Benefits

Entertainment Events

Corporate Sponsorship

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Chrissy MoffattDirector, Taxation & Accounts Payable

Private Business Use

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• Tax Exempt Bonds

• What is Private Business Use?

• UBI and PBU Relationship

• Required Actions

• Summary

AgendaPrivate Business Use

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• As a 501(c)3 organization, CMU is eligible to issue bonds at tax-

exempt interest rates.

• These rates are lower than taxable rates and allow the investors to

earn interest on which they do not have to pay income tax.

• As rates are not income-tax eligible, the IRS mandates certain rules

related to how we spend the money, and subsequently how we

use and manage the facilities or projects financed by the bonds.

• These rules apply to the bonds for as long as they are outstanding,

including any refinancings. The rule is for “the life of the bonds

(including any refundings) plus three years.”

• Our average debt issuances have about a 30-year life.

Tax-Exempt BondsPrivate Business Use

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2017 Bonds $62.17M

Outstanding

2013 Bonds

$52.25M Outstanding

2012 Bonds $82.8M Outstanding

• 1998 bonds

• 2002 Bonds

2009 Bonds $120M Outstanding

• New Money

• 1995 Bonds

• 1988 Bonds

• 1985 Bonds

• 1984 Bonds

• 1983 Bonds

• 1982 Bonds

2008 Bonds $120.82M Outstanding

• 2006 Bonds

• 2007 Bonds

Tax-Exempt Bonds: Bond Issuance HistoryPrivate Business Use

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Facilities Funded with Tax-Exempt Bond ProceedsPrivate Business Use

Building Name Tax-Exempt Bond Issue Building Name Tax-Exempt Bond Issue

4616 Henry Street 2008 ($120.82M) Skibo Gymnasium 2008 ($120.82M)

Baker - Porter Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

The Gates and Hillman Centers 2008 ($120.82M), 2009 ($120M)

College of Fine Arts 2012A ($32.805M), 2012B ($50M) Wean Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

Doherty Hall 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

300 South Craig St. 2008 ($120.82M)

GSIA 2009 ($120M), 2012A ($32.805M), 2012B ($50M) 4516 Henry Street (UTDC) 2012A ($32.805M), 2012B ($50M)

Hamburg Hall2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

6555 Penn Avenue 2008 ($120.82M)

Hamerschlag Hall2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

East Campus Garage 2008 ($120.82M), 2009 ($120M)

Hunt Library 2012A ($32.805M), 2012B ($50M) Facilities Management Services Bldg2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

Jared L. Cohon University Center2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

Gesling Field 2012A ($32.805M), 2012B ($50M)

Margaret Morrison Carnegie Hall2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

Richard M. Cyert Hall2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

Mellon Institute 2008 ($120.82M), 2009 ($120M), 2012A ($32.805M), 2012B ($50M)

Warner Hall 2012A ($32.805M), 2012B ($50M)

Newell-Simon Hall 2009 ($120M), 2012A ($32.805M), 2012B ($50M) Whitfield Hall 2012A ($32.805M), 2012B ($50M)

Purnell Center for the Arts 2012A ($32.805M), 2012B ($50M) Pittsburgh Technology Center 2012A ($32.805M), 2012B ($50M)

Roberts Engineering Hall 2008 ($120.82M), 2012A ($32.805M), 2012B ($50M) Software Engineering Institute 2009 ($120M)

Scott Hall 2013 ($52.25M)

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Facilities with Indirect Impact OnlyPrivate Business Use

Building Name Indirect Use

Elliott Dunlap Smith Hall Chilled water from FMS Campus Plant

Gates Garage Chilled water from FMS Campus Plant

Scaife Hall Chilled water from FMS Campus Plant

Posner Center Chilled water from FMS Campus Plant

Collaborative Innovation Center Chilled water from FMS Campus Plant

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• Because the university issues tax-exempt bonds, certain rules apply to how we spend that

money, and what we do in the space funded by that money.

• Failure to follow the rules jeopardizes the tax exempt status of the bonds:

• Immediate payoff of the bonds

• “Event of default” under all the university’s debt

• Retroactive declaration by the IRS that the bond interest is “taxable” to the buyers

• University liable for associated tax and penalties

• Public disclosures, causing reputational issues

• Rating agencies could reduce the university’s debt ratings

• Educating campus community helps to protect the bonds’ status and university assets.

Why is This Important? Private Business Use

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What is Private Business Use? Private Business Use

Relates to activities that occur in bond-

financed space

• Unrelated activity

• Special legal entitlement* to a third-party

• Result of a non-compliant research agreement or service/management contract

Requirements

• Cannot exceed 3% over the life of the bonds

• Must be reported annually on the university’s Form 990 Schedule K

Common Areas

• Research Contracts

• Management Contracts

• Leases

PBU and UBI

• Correlates closely to Unrelated Business Income

• If you have UBI, you have PBU

*Special legal entitlement could be a share of profits (economic benefit) or related to the use of the bond-financed facility.

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Permitted Research

• “Basic research”

• Any original investigation for the advancement of scientific knowledge not having

a specific commercial objective

Private Use Research

• Research that generates UBI

• Research that provides specific benefits to a sponsor

• Exclusive Paid License

• Nonexclusive Royalty

• Consortia

PBU and Research ContractsPrivate Business Use

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Unrelated Business is PBU and the focus is on the activity:

Where is this activity occurring? PBU can only happen in bond-financed space

What is happening in the space? If a CMU group is engaging in an “unrelated business activity” in this bond financed space- this is PBU

Who else is using the space/performing the activity?

UBI and PBU RelationshipPrivate Business Use

PBU measurement calculated on a

bond by bond-issuance basis by:

• Length of time using the space

• Amount of space used

• Revenue generated off of the

space

• A combination thereof

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Complete the annual questionnaire.

Consider new activities and whether they are in-line with our mission or give an unrelated third party “special legal entitlement” to profits or use of our facilities.

Bring the appropriate team in early to the conversation to:

• Analyze the impact of the activity on the PBU calculations to see if allowable.

• Assist with negotiating the terms to avoid PBU issues.

Required ActionsPrivate Business Use

ACTIVITY EXAMPLEAPPROPRIATE DEPARTMENT

ResearchFederal or corporate sponsor

Office of Sponsored Programs

Management Contract or Lease

New diningvendor, Leasing space to outside parties

Office of General Counsel

Unrelated Business Activities

Conferences, camps

Office of GeneralCounsel

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PBU relates to activities that occur in bond-financed space and are:

• an unrelated activity

• and/or give special legal entitlement to a third-party

• and/or the result of a non-compliant research agreement or

service/management contract

Completion of the annual questionnaire helps in identifying PBU so it can be

monitored and measured appropriately.

Being able to identify new activities that could potentially be UBI or PBU will

allow you to bring in the appropriate teams early enough on to:

• Analyze the impact of the activity on the PBU calculations to see if allowable

• If appropriate, assist with negotiating the terms to avoid PBU issues

• And, include any potential UBI tax implications into the budget

SummaryPrivate Business Use

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Annual Survey Q&A