January 29, 2015

By Karen Dunn, JD, LLM

In an effort to address the frustration expressed by tax practitioners and the IRS regarding the inadequacies of the current Form 990-T, Exempt Organization Business Income Tax Return, The Advisory Committee on Tax Exempt and Government Entities (ACT) recommends a significant redesign of the form.

A line-by-line activities checklist spearheads the redesign. The answers would flow to the Form 990-T, but the checklist would not be open to public disclosure as is the rest of the form. It will include links to education and outreach materials as well as specific worksheets for calculating revenues and expenses for certain unrelated business income activities.

The 990-T was first introduced in 1951 and has since remained substantially unchanged and currently cannot be e-filed. Tax practitioners complain of a lack of clarity and guidance and the IRS expresses frustration over the lack of information received from the current Form 990-T. Will the proposed redesign lessen these problems? At the very least, the form will be web based and presumably e-filed. If adopted by the IRS, we hope the new form would be simpler, shorter, provide more information through a series of yes/no questions, and heighten education and outreach through links to worksheets, IRS publications, and other sources of information about unrelated business income.

The proposed checklist should make the form easier by providing a list of 60 to 70 typical types of unrelated activities.[i] Clicking a chevron in the checklist will take the user to guide sheets that provide more detail, information, and examples for that particular item. Some items also will link with worksheets that provide step-by-step computation guidance. The form should be interactive, with data flowing automatically from the worksheets to the checklist and then to Part I of the form. With most of the information in linked worksheets not filed with the form, the ACT proposes that the actual filed return be only two to three pages long. The checklist would be on-line, interactive, and electronically filed with the IRS, but not open to public inspection.

It would look something like this:

ACT graphic

 And the list continues with all types of unrelated business activities including a few blank lines for items not specified on the list.

To address the IRS need for more information, the Proposed New Form 990-T includes a section of yes/no questions. The ACT incorporated six suggested questions provided by the IRS and left space for a few additional questions. Some of the questions address dual use facilities, expense allocation methods, profit motive and losses, and the organization’s processes for ensuring compliance.

The 2014 House Ways and Means Committee Tax Reform Proposal suggests that the net unrelated business taxable income of each activity be calculated separately. The ACT does not comment in this report whether they agree or disagree with this proposal, but points out that the redesigned Form 990-T, with its separate line items for various unrelated activities, facilitates this proposal should it become law.

Regardless of whether the IRS adopts this recommended revision, it is clear that after 64 years, it is time to make some changes.

[i] The list of 12 activities in the sample proposed Form 990-T is by no means intended to be a complete or final list. The final list of activities will take more work and collaboration.

© Clark Nuber PS, 2015.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.