Amidst the large amount of guidance pending for the CARES Act, the IRS has released the long-awaited 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 2017 Tax Cuts and Jobs Act. Previously, the IRS had issued Notice 2018-67 as interim guidance.
Requirements for UBTI
For tax years beginning after December 31, 2017, organizations with more than one unrelated trade or business must calculate Unrelated Business Taxable Income (UBTI) separately for each trade or business. The Proposed Regulations provide further guidance and state that:
- NAICS 2-digit codes generally must be used to identify a separate trade or business. This is a welcome change from the interim guidance that required use of 6-digit codes.
- Certain investment activities can be aggregated and treated as one trade or business. These include partnerships that pass the de minimis test (owning no more than 2% of profits or capital) or the control test (owning no more than 20% and does not control the partnership).
- Additional guidance will be provided on the proper allocation of expenses between both separate trades or business and between exempt and non-exempt activities.
- Charitable deductions do not need to be allocated among businesses.
- Net Operating Losses (NOL) created before 2018 should be deducted prior to a post-2017 NOL within each trade or business.
- The IRS will need to provide further guidance related to the CARES Act’s temporary repeal of the 80% limitation on NOL deductions.
- Special rules were included for VEBAs, social clubs, and supplemental unemployment benefit trusts.
- The regulations now require IRAs to determine whether they have multiple trades or businesses under section 512(a)(6).
Organizations can rely on the Proposed Regulations or the guidance provided in Notice 2018-67 until Final Regulations are released. We recommend considering how these may impact your organization. Please contact your Sikich Not-for-Profit team with any questions.