Back in May, the IRS released Proposed Regulations under Section 512(a)(6), related to the separate reporting for each unrelated trade or business of tax-exempt organizations. This section was established in the Tax Cuts and Jobs Act (TCJA) and, at the time, had only interim guidance in place. On November 30, 2020, the official regulations were released, which featured only minor changes from the prior proposed regulations.
Background on Unrelated Business Taxable Income (UBTI)
The TCJA established that organizations with more than one unrelated trade or business must calculate Unrelated Business Taxable Income (UBTI) separately for each trade or business for tax years beginning after December 31, 2017.
The final regulations address an issue presented in the proposed regulations earlier this year. In the finalized version, the IRS removes the “unintentional error” requirement for not-for-profit organizations selecting an NAICS code for their separate unrelated trade or business. Organizations are now asked to only indicate that they made a change to their NAICS code and the reason for such when filing Form 990-T.
Additionally, the final regulations state that tax-exempt entities must allocate deductions between separate unrelated trades or businesses in accordance with the reasonable basis standard defined in section 1.512(a)-1(c), if they have more than one unrelated trade or business. While the unadjusted gross-to-gross method can still be used by organizations that do not offer the same services at different rates per customer, the final regulations state that it is not an acceptable allocation method under normal circumstances.
Organizations with more than one unrelated trade or business are able to complete their public support test using UBTI calculated in the aggregate or calculated under section 512(a)(6).
Lastly, the IRS provides an explanation on the qualifying partnership interest rule and how it applies to S Corporations. They also renamed the “control test,” which takes K-1 activities and groups them together into qualified partnership interest, to the “participant test.”