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. The guidance will help them properly file the Form 990-T and comply with the special net operating loss rules for exempt organizations created under the Tax Act of 2017.
Clark Nuber has created a series of flow charts for organizations to refer to when navigating the final regulations, which are effective for tax years beginning after December 2, 2020. The flow charts also illustrate some of the challenges and administrative burden the siloing rules will have on organizations with a significant amount of UBTI activity from more than one trade or business, most notably if they have an extensive portfolio of alternative investments.
Under the Tax Act of 2017, exempt organizations with more than one unrelated trade or business are not allowed to offset a net operating loss from one trade or business with the income from another trade or business. As a result, a not-for-profit is required to bucket or silo its trade or business activities for reporting purposes. For tax years beginning after December 22, 2017, for compliance purposes, the organization reports every trade or business separately on the Form 990-T. As such, the 2020 Form 990-T has been redesigned to have the summary information reported in the core Form 990-T and each trade or business is reflected on a separate Schedule A.
On September 4, 2018, the IRS issued Notice 2018-67, providing initial guidance on the new unrelated business income tax rules and requested comments. On April 24, 2020, the proposed regulations [REG-106864-18] were issued, which were a continuation of the original notice with consideration made from comments from the sector. The final regulations [TD 9933] published on December 2, 2020, and all organizations with tax years beginning after December 2, 2020, comply with the regulations. (If an organization has a tax position contrary to the regulations, it should disclose on a Form 8275-R.) Before the effective date of the final regulations, organizations may rely on Notice 2018-67, the proposed regulations, the final regulations, or a reasonable and good-faith interpretation of the siloing rules under section 512(a)(6).
If you have any questions regarding the siloing of UBTI, please contact a Clark Nuber tax professional.
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