Federal Tax Information

IRC section 511(a) imposes a tax on the “unrelated business taxable income” (UBTI) of exempt section 501(c)(3) organizations.

UBTI is defined as an activity that meets three requirements:

1. It is a trade or business,
2. It is regularly carried on, and
3. It is not substantially related to furthering the exempt purpose of the organization.

The determination of UBTI is based on all of the facts and circumstances. If an item of income is determined to be UBTI, there are modifications, exclusions, and exceptions that could potentially exclude the income from tax.

Generally activities listed below to University of Nebraska System students or employees are not considered UBTI, as these activities can be considered an exception to UBTI for internal party convenience under IRC section 1.513-1(e)(2). When activities are provided to the general public, it is considered outside our exempt purpose and fails to meet the convenience exception e.g., summer camps, nonstudents, nonemployees, external businesses. Please see the examples below.

More information is available here.

Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. The key difference for behavioral control is whether the University of Nebraska System has retained the right to control the details of the worker’s performance or instead has given up that right. Consider these key elements related to the individual’s duties, and use the Independent Contractor Checklist when making determinations on behavioral control.

• Who determines when and where the individual is required to do the work?
• Who determines what tools or equipment is to be used?
• Who determines the additional workers to hire to assist with the work?
• Who determines the type of work to be performed by each worker?
• Who determines the order or sequences to follow?
• Who determines and provides training and instruction for the work to be done?  

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. Consider these key elements related to the business aspects of the relationship between the individual and the University of Nebraska System, and use the Independent Contractor Checklist when making determinations on financial control.

• Extent of Investment: An independent contractor often has a significant investment in the facilities and tools they use in their performance of work for others. However, a significant investment is not necessary for independent contractor status.
• Business expenses: Independent contractors are more likely to incur expenses related to the service performed that are not reimbursed by the University than are expenses incurred by employees. Fixed ongoing costs that are incurred by the contractor regardless of any work performed are especially important in determining status. However, employees may also incur expenses in connection with the services being performed that are not reimbursed.
• Availability: An independent contractor is generally free to seek business in the open market. They often advertise, maintain a business location and are available to work for the public.
• Payment: An employee is generally guaranteed a regular wage amount for hourly, weekly, or monthly periods of time, which usually is an indicator that a worker is an employee even though commissions may supplement their pay. An independent contractor is usually paid by a flat fee for a certain job but can be paid on an hourly basis in some situations such as for attorneys and accountants.
• Profit or loss: An independent contractor realizes a profit or a loss while an employee does not.

Type of Relationship factor relates to how the workers and the business owner perceive their relationship. Consider these key elements related to the relationship between the individual and the University of Nebraska System, and use the Independent Contractor Checklist when making determinations on type of relationship.

• Contracts: Written contracts that describe the relationships intent. This is very significant if the relationship is difficult to determine.
• Benefits: If the worker is paid benefits such as insurance, pension or paid leave by the University this is an indication this person is an employee. If they do not receive benefits this does not mean they cannot be classified as an employee.
• Permanency of relationship: If a worker is engaged by the University with the expectations the relationship will continue indefinitely, rather than for a specific project or period, this is generally evidence of intent to create an employer-employee relationship.
• Daily Business Activities: If the worker provides services that relate to the daily business activity, then the University will be more likely to have the right to direct and control and would indicate an employer-employee relationship.

In general, the fair market value of tickets to sporting and entertainment events is taxable when provided to employees. This includes tickets to university football games, basketball games, concerts, performing arts, etc.

Exclusions from Taxable Income:

• No Additional Cost: If a home athletic game or campus event has excess capacity or unsold tickets, the value of tickets given to employees may be excludable from income under the “No Additional Cost” rule. IRC §132(b); Reg. §1.132-2
• Qualified Employee Discount: An employee can receive a maximum 20% discount of the face value of a ticket to a home athletic game or campus event for use by the employee under the Qualified Employee Discount Exclusion. This does not apply to away games. IRC §132(c); Reg. §1.132-3
• Working Condition: If an employee receives a ticket to attend a game/event in a working capacity, the value of the ticket may be excluded as a working condition fringe benefit. This exclusion may apply if the employee is required to entertain individuals who have a business relationship with the University. The exclusion would not, however, exclude the value of any tickets that are used to entertain the employee’s spouse, family members, or personal acquaintances. Also, in order to qualify as a working condition fringe benefit, the employee must maintain adequate records showing that the tickets were, in fact, used for business purposes. IRC §132(d); Reg. §1.132-5

In general, awards, prizes, and gifts given to employees are taxable unless they meet IRS provided taxability exceptions. This includes gift cards, credit/debit cards, campus cash, campus merchandise, etc.

Exclusions from Taxable Income:

• Length of Service Awards: An award of merchandise up to $400 fair market value is not taxable if it is given for length of service, as long as that award is provided as part of a meaningful presentation to the employee and is not given during the employee’s first 5 years of employment. This exclusion does not include cash or cash equivalents (gift cards, gift certificates, credit/debit cards, campus cash). IRC §274(j)(4)(B)

Effective Jan. 1, 2018, due to the passage of the Tax Cuts and Jobs Act, all expenses and allowances paid directly to an employee or to a third party to assist with moving personal items and relocation of the employee and family members are considered taxable.

For this section, the term “club” refers to those clubs organized for business, pleasure, recreation, or other social purpose. Examples include country clubs, golf and athletic clubs, airline clubs, hotel clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussion. Reg. §1.274-2(a)(2)(iii)(a)

Club memberships and dues are not allowed as business deductions. If an employer pays, reimburses, or otherwise provides these benefits for an employee, the entire value is taxable to the employee. IRC §274(a)(3)

Please note that club memberships and dues provided by a third party (for example, the University of Nebraska Foundation) that are provided based on employment with the University are taxable to the employee as wages.

The value of travel provided for an employee’s spouse, dependent, or other accompanying individual is generally taxable income to the employee.

Exclusions from Taxable Income:

• Working Condition: If both of the following conditions are satisfied for companion travel, the benefit is not taxable. Reg. §1.132-5(t)
• It can be adequately shown that the spouse’s, dependent’s, or other accompanying individual’s presence on the employee’s business trip has a bona fide business purpose, and
• the employee substantiates the travel.

Please note: IRS rulings and regulations have taken a narrow view of what qualifies as a bona fide business purpose. The purpose of the spouse’s travel must be to serve the business interests of the University in a substantial way. The spouse’s business activities conducted on the trip must be more than incidental; typing notes and attending luncheons and dinners have been held to be incidental. Revenue Ruling 56-168; Reg. §1.162-2(c)

• Charter Flight Seating Capacity Rule: If 50% or more of the available passenger seats on an aircraft are occupied by individuals whose flights are primarily for the employer’s business, then the value of the flight to employees, their spouse, and dependent children who are not flying primarily for the employer’s business (see working condition information above) is deemed zero.

Please note: This taxability exemption only applies to those individuals that would be included on the employee’s personal tax return i.e., spouse and dependent children. This exemption does not include unmarried significant others, cousins, siblings, etc. If the 50% test is not met or there are individuals that are not the employee’s spouse or dependent children, the tax department can assist in the calculation of the taxability to the employees using the Standard Industry Fare Level (SIFL) formula.