Flow Charts for Implementing UBTI Siloing Rules

This article has been updated to reflect the latest guidance as of 5/26/2021. It was originally published on 6/1/2020. 

On December 2, 2020, the IRS published final regulations on the unrelated business taxable income (UBTI) siloing rules required under the Tax Act of 2017 and section 512(a)(6) of the Internal Revenue Code. Exempt organizations with multiple unrelated trades or businesses have been waiting for the final guidance as it helps define the extent to which organizations will need to silo UBTI activities.

While the guidance leaves several unanswered questions, it does give organizations a road map of how to define and bucket their various trade or business activities.

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IRS Issues Proposed Regulations on Unrelated Business Siloing

After a long wait, the IRS finally issued proposed regulations on the unrelated business taxable income (UBTI) “siloing” rules on April 24, 2020.

These rules, under section 512(a)(6) of the Internal Revenue Code, require separately computing UBTI for multiple unrelated businesses. Thus, one cannot use a loss from one unrelated business to offset the taxable income of another unrelated business.

Here are the highlights:

Use of NAICS Codes

The proposed regulations allow the use of only the first two digits of the NAICS codes, along with considering all the facts and circumstances, to identify separate unrelated businesses. Currently,

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The IRS Draft Form 990-T Gives UBI Clues (Updated)

Note: This article, originally published on October 16, 2018, has been updated to include the latest developments regarding the Tax Cuts and Jobs Act. 

The IRS published a draft 2018 Form 990-T* and Instructions** for exempt organizations. These will help organizations gain an understanding of its 2018 unrelated business income (UBI) tax liability. Treasury (the IRS) is using the Form 990-T to provide guidance on two of the most impactful changes to UBI from the Tax Cuts and Jobs Act:

  • The creation of UBI from the provision of non-taxable qualified transportation benefits to employees; and
  • The segregation of separate trade or business activities with losses when there is more than one trade or business activity.

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Segregating Unrelated Trades or Businesses

Beginning in 2018, unrelated business taxable income (UBTI) must be computed separately for each unrelated trade or business. Net operating losses (NOL) from one unrelated trade or business may not be used to offset income from another unrelated trade or business. The unused NOL may be carried forward to future years but may only reduce income from the same trade or business that generated it.

This is a radical departure from previous law, where unrelated businesses, except for advertising or exploited exempt activities, were commingled in computing (UBIT). The new subsection was created in response to concerns that net operating losses from activities in which there is no profit motive were offsetting the income from other unrelated business activities.

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