Tax-exempt organizations, including governmental colleges and universities, may be subject to a tax on unrelated business income (UBI).
An exempt organization, including a governmental entity, is not taxed on its income from an activity substantially related to the educational or other exempt purpose that is the basis for the organization’s exemption. Such income is exempt even if the activity is a trade or business. However, if an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business.
For more information on determining unrelated business income, computing, reporting and paying the tax, see Publication 598 , Tax on Unrelated Business Income of Exempt Organizations.