- Unrelated Business Income Tax (UBIT)
- Establishing the Account
- Institutional Expenses and other Accounting Issues
- Project Closeout
Because the University is formally classified as a non-profit, tax-exempt institution, there are particular concerns and needs in relation to the financial management of corporate- and industry-sponsored projects from which data or other products are expected -- i.e., projects with income-generating potential. The University has developed the following policy statement in relation to such instances:
Because the University is a non-profit, tax-exempt institution whose purposes include, but are not limited to, the advancement of education, the promotion of health and the conduct of scientific research, the University must account for business income unrelated to its exempt purposes. A liability exists for federal and state income taxes on unrelated business income after the deduction of reasonable, allowable and allocable expenses.
When projects are sponsored by a business entity, the University must determine whether the project will be subject to Unrelated Business Income Tax (UBIT) or qualify under the University's tax-exempt status.
The conduct of scientific research is considered an exempt activity and should not generate UBIT. The Internal Revenue Service has determined, however, that some activities carried to commercial or industrial operations can no longer be classified as research. In such cases, the project will be exempt only if the University can demonstrate that the project is substantially related to its mission, by establishing that the project:
- Is designed and supervised by professionals to solve a problem via the scientific method, through hypothesis, design, testing, and data analysis; adds to knowledge within a scientific field; can only be performed with advanced scientific or technical expertise; involves the development of new ideas, skills, methods; or
- Is conducted in the public interest -- e.g., seeks a cure or treatment for disease, provides a treatment opportunity not otherwise available to patients, tests for public safety, etc. -- and the results will be made available to the public; or
- Furthers an educational purpose, where students or trainees involved in the project will have specific tasks and duties and investigators are free to publish findings in a timely manner.
The Division of Sponsored Programs and the Grant Accounting Office require certain documentation to establish an account to manage corporate- and industry-sponsored projects. Specifically, the following are required:
- The University of Iowa Proposal Routing Form, fully completed and signed;
- A detailed project budget and payment schedule (ex: standard federal grant and contract format); and
- A fully executed contract or other award agreement accepted by the University and the corporate or industry sponsor.
Corporate- and industry-sponsored projects are assessed Facilities and Administrative (F&A) Costs to cover overhead and other institutional expenses incurred in the project conduct and administration, typically based on the federally approved F&A rate for on-campus research. The current federal rate is 51% of the modified total direct costs (MTDC), where the base calculation excludes certain budget categories -- i.e., patient care costs; subcontract amounts above and beyond the initial $25,000; building repair costs; utilities; tuition; facility leasing; and equipment purchases.
There is a single exception to the above, applied only to corporate- and industry-sponsored clinical trials. Corporate- and industry-sponsored clinical trials are charged a minimum F&A rate of 25% of the total direct costs (TDC) -- meaning the base calculation includes all budget categories, no exclusions. Although the University will accept an F&A rate of 25% TDC, investigators are encouraged to charge up to the full federally approved rate of 51% MTDC whenever possible.
When charging costs against the sponsored project, investigators must exercise diligence, charging only those expenses that are justifiably allowable, allocable, and reasonable. The University accounting system must be able to account for all revenues and expenses.
An investigator engaged in a corporate- or industry-sponsored project is responsible for notifying the departmental administrator upon the project's completion. The administrator will then notify the Division of Sponsored Programs. The Principal Investigator must provide DSP with a copy of the final project report that was submitted to the sponsor. Upon DSP notification, or upon reaching the established project end date, the Grant Accounting Office will initiate the project closure procedures. The Principal Investigator and his/her department will be allowed a 90-day period following project completion to make appropriate adjustments and corrections to the project account and determine if a residual balance exists. The GAO will review the account to ensure the appropriateness of costs before closing the account.
When applicable, Unrelated Business Income Tax (UBIT) will be assessed on the residual balance. The tax rate is based on the prevailing federal, state, and local corporate income tax rates for taxable income (currently 34% Federal, 8% State, and 0% local). The Grant Accounting Office will retain, within a project account, all federal and state income taxes assessed on the project's net balance.
If a project was assessed a reduced F&A rate, as negotiated with the Division of Sponsored Programs, and ends in a surplus, the University will claim additional F&A to cover the institutional expenses associated with the project's conduct. The University may assess up to the full F&A rate on incurred expenses -- 25% TDC on clinical trials and 51% MTDC on all other awards, unless some other maximum rate is stipulated within the sponsor's written policies -- but will in no case assess additional F&A costs that would drive the account into a deficit balance.
After UBIT and full F&A costs have been assessed, the remaining balance will be returned to the sponsor if required, or transferred to an Organized Activity (fund 240) account to be administered by the Principal Investigator's department, provided the sponsor allows. If the latter, expenditures will be directed by the PI who originally obtained the funds, supporting his/her research as long as the investigator maintains a regular faculty or staff appointment at the University. If the investigator leaves the University or experiences a change in status that renders him/her ineligible to serve as a principal investigator, the departmental executive officer will direct expenditure of the funds in support of departmental programs.
Deficits and Disallowed Charges
If an audit determines that certain expenditures were charged to the project in error, or that the project is subject to Unrelated Business Income Tax, the department will be responsible for any errors and any additional tax, interest, and associated penalties due the IRS, the State Department of Revenue and Finance, or any other taxing authority.
In cases where the Principal Investigator transfers to another institution or organization prior to completing the study, the PI and department should consult the Grant Transfer guidelines, available through the DSP Policies and Procedures site.
In cases where the Principal Investigator leaves The University of Iowa after the project has been closed out, any remaining funds will be transferred to the PI's departmental executive officer for his/her discretionary use in departmental research.