Guidance on UBIT for Exempt Organizations’ Separate Trades or Business Will Require OMB Review

Guidance on the unrelated business income tax for exempt organizations’ separate trades or businesses has been determined to be significant and must be reviewed by the Office of Management and Budget before release.

Drafting of proposed regulations under IRC Section 512(a)(6) is “relatively far along,” but review by the OMB’s Office of Information and Regulatory Affairs means their release could be delayed. IRC Section 512(a)(6) part of the Tax Cuts and Jobs Act, requires an exempt organization with more than one unrelated trade or business to calculate unrelated business taxable income separately for each trade or business. The IRS in August 2018 issued interim guidance and transition rules in IRS Notice 2018-67. 

E-Filing on Form 1023 Application for Recognition of Exemption Status under Section 501(c)(3) is coming soon in 2020

In January 2020 the IRS plans to have available an electronic filing portal for organizations applying for tax-exempt status. However, many practitioners are concerned that the electronic form won’t allow organizations to make full and complete disclosures. 

The same information is still required on the Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” but the form will be updated to make it more conducive to e-filing.

There is expected to be a transition period in which the IRS will still accept paper filings. The length of the transition period has not yet been determined and the move toward e-filing of exemption applications is required under the Taxpayer First Act, which was signed into law in July. The streamlined exemption application, Form 1023-EZ, is already required to be filed electronically.

Illinois Repeals Unrelated Business Income Tax on Parking and Transportation Benefits for 2019

For tax years beginning on or after January 1, 2019 Illinois will no longer consider qualified parking and transportation benefits under Internal Revenue Code Section 512(a)(7) as unrelated business income for Illinois purposes.  

IRS Issues Proposed Rules to end Donor Reporting for non-501(c)(3) Organizations

In September the IRS has issued proposed regulations to clarify the reporting requirements for tax-exempt organizations. The proposed regulations follow Revenue Procedure 2018-38 revising the types of tax-exempt organizations that are required to disclose the name and addresses of substantial contributors. 

The IRS also issued Notice 2019-47 which provides penalty relief for non-501(c)(3) organizations exempt from tax that did not report contributors’ names and addresses in reliance on Revenue Procedure 2018-38 before a court order set aside the Revenue Procedure due to the IRS failure to follow notice and comment procedures.

Proposed Regulations

The proposed regulations modify the existing regulations under IRC Section 6033 to generally adopt the guidance issued in Revenue Procedure 2018-38, as well as to update the regulations to reflect certain other guidance and statutory changes. As such, the proposed regulations are intended to more accurately and comprehensively reflect current reporting requirements applicable to exempt organizations.

The regulations are proposed to be effective as of the date of publication of final regulations adopting the rules. The IRS states that tax-exempt organizations may choose to apply those final regulations, once effective, to returns filed after the date of filing of the proposed regulations.

Reporting contributors’ names and addresses

The proposed regulations state that the requirement to report the names and addresses of substantial contributors generally apply only to IRC Sections 501(c)(3) and 527 organizations. Reducing the number of tax-exempt organizations that provide the names and addresses of contributors, will minimize the potential for inadvertent disclosure of names and addresses and thus minimize the risk of exposing information not open to public inspection.

However, tax-exempt organizations must still file Schedule L of Forms 990 or 990-EZ identifying transactions between the organization and interested persons (including substantial contributors) that may indicate possible risks of private benefit or inurement. Other exempt organizations not described in IRC Section 501(c)(3) or 501(c)(27) will still be required to report the amounts of contributions from each substantial contributor and maintain the names and addresses of substantial contributors in their books and records should the IRS need request this information.

For additional information, please contact your Sikich representative.

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