Question 1

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)?

Accepted Answer

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.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Thinking all income of a non-profit is exempt, or that investment income is business income.

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)?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 2

More questions from this exam