On April 24,2020, the IRS and Treasury issued proposed regulations under Section 512(a)(6) of the Internal Revenue Code to provide guidance for tax-exempt organizations on how to identify separate unrelated trades or businesses and how to calculate their unrelated business taxable income (“UBTI”).
Under the Tax Cuts and Jobs Act, Section 512(a)(6) requires tax-exempt organizations that are subject to UBTI to separately calculate UBTI for each trade or business. This process is often referred to as “silo-ing.”
Under the proposed regulations, an exempt organization can utilize the first two digits of the North American Industry Classification System (NAICS) to identify separate unrelated trades or businesses. Each code would only be used once in reporting unrelated trades or businesses, thereby allowing organizations to aggregate all activities under a particular code.
Additionally, investment activities specifically listed in the proposed regulations – qualifying partnership interests; debt-financed properties; and qualifying S-Corporation interests – will be treated as separate unrelated trades or businesses.
Consistent with prior guidance, investment activities from qualifying partnership interests can be aggregated for 990-T reporting if the exempt organization meets the de minimis test of holding directly no more than two percent of the profits interest and no more than two percent of the capital interest.
The proposed regulations briefly address the coordination of NOLs with each separately identified unrelated trade or business, however, with the CARES Act legislation that passed just weeks ago, the Treasury and IRS will consider how the CARES Act legislation affects the calculation of unrelated business taxable income under Section 512(a)(6) and may issue additional guidance.
The proposed regulations have a comment period that ends June 23, 2020.
See our coverage on the CARES Act and other COVID-19 items here, including our insight on the automatic extension by the IRS of Forms 990 and 990-T originally due on or after April 1, 2020 and before July 15, 2020.
If you have questions about how your specific organization is impacted, please reach out to your Warren Averett advisor directly, or request that a member of our team reach out to you.
This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.