Traditional nonprofit public and private colleges and universities historically have been granted tax-exempt status, which permits them to use more resources to fund the educational activities, academic research, student financial aid, and community programs that fulfill their core missions of teaching, research, and public service. As tax-exempt entities, universities are regulated by both the Federal government as well as State governments. Each year, these institutions must demonstrate their compliance with federal and state laws and regulations that govern tax-exempt entities through tax filings, audits, and public reports.
Although nonprofit universities are tax-exempt entities, they are subject to tax on any unrelated business income (UBIT). In addition, nonprofit institutions of higher education often make voluntary payments in lieu of taxes (PILOTs) to their localities as a substitute for property taxes and, in some instances, they also pay property taxes on any commercial properties that earn a certain amount in annual income.