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Business Procedures Manual

23.3 Allowable UBI Deductions

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To qualify as a deduction in computing net unrelated business taxable income, an expense must be:

  1. An allowable deduction for income tax purposes; and,
  2. Directly or indirectly connected with fulfillment of the unrelated business activity.

Deductible expenses fall into two broad categories: direct and indirect costs.

23.3.1 Direct Costs

Examples of “allowable direct deductions” include:

  • Salaries, wages, and employee benefit costs when the effort devoted and the benefit derived are directly identifiable with a specific UBI-applicable activity
  • Supplies and other general expenditures including travel, telephone and technology charges, etc.
  • Equipment purchases
  • For self-sustaining operations, equipment, depreciation, operations and maintenance of plant, and institution general administrative support charges
  • Interest paid to third parties during building construction, maintenance, and remodeling prior to occupancy/capitalization

23.3.2 Direct Cost Allocations

When personnel, facilities, supplies, equipment, and other institution assets are used to conduct both exempt and non-exempt activities, the institution must allocate the costs between the two uses on a reasonable basis. In most instances, allocations based on the percent of time devoted to each activity will fulfill the reasonableness test.

Note: IRS guidelines require institutions to use 24 hours per day, 365 days per year as the basis for allocation direct costs, not the actual number of days used.


23.3.3 Indirect Costs

Examples of “allowable indirect deductions” include:

  • Building usage
  • Equipment usage
  • Operations and maintenance costs
  • General institutional administrative costs
  • Departmental administrative costs

23.3.4 Indirect Cost Allocations

Indirect costs will be allocated to unrelated business income activities, in accordance with OMB Circular A-21, Principles for Determining Costs Applicable to Grants, Contracts and Other Agreements with Educational Institutions. Refer to http://www.whitehouse.gov/omb for more details.


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