Here’s a question we get occasionally: Our school has coin-operated washing machines and
dryers are used by resident students to wash linens, clothing, etc. Do the revenues from the
Laundromat constitute unrelated business income? What if the Laundromat is open to the general
public for their use as well as use by students?
Let’s start with the student use and answer “No” – generally due to the “convenience exception”
If, however, there is use by the general public – beyond the obvious security risks (and that’s an
“Enterprise Risk Management” (ERM) discussion) – potential unrelated business income issues
would generally depend upon the percentage of public use. For the fun of it, let’s say that the
Finance Team at this college has done some analysis and 27% of their laundry revenues come
from the general public (not students nor staff).
From IRS Publication 598:
Convenience of members. A trade or business conducted by a 501(c)(3) organization or by a
governmental college or university primarily for the convenience of its members, students,
patients, officers, or employees is not an unrelated trade or business. For example, a laundry
operated by a college for the purpose of laundering dormitory linens and students’ clothing isn’t
an unrelated trade or business. (Color added for emphasis.)
The laundry is clearly for the convenience of the college’s students.
So, would this college be safe (in the UBIT sense) in operating a laundry facility where 27% of
revenues came from the non-student public? Hmmm. I would suggest that the “public” limit
would be closer to 15%, based upon other UBIT provisions in the Code. And, if the college
actively advertised the laundry to the public and/or competed with for-profit, local laundries in
other ways, the IRS might deem the income from the general public to be unrelated business
income and subject to tax. Note that the college could deduct direct and allocable expenses
against this income when the filed Form 990-T each year. Also, the college would need to
ascertain which “silo” (from NAICS two-digit codes) their “laundry operations” fit into for
completing Form 990-T, Schedule A – but that is another topic…
Written by: David C. Moja, CPA www.mojacompany.com
The information provided herein presents general information and should not be relied on as accounting,
tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions
regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel
about the facts and laws that apply.