Flow Charts for Implementing UBTI Siloing Rules

Posted on Jun 1, 2020

On April 23, 2020, the IRS issued the proposed 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 eagerly awaiting the 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 to properly file the Form 990-T and comply with the special net operating loss rules for exempt organizations that were created under the Tax Act of 2017.

To provide assistance, Clark Nuber has created a series of flow charts for organizations to refer to while navigating the proposed regulations. 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.

Background

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 its first trade or business on page one of the Form 990-T, and each subsequent trade or business on a separate Schedule M of the Form 990-T.

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 IRS and Treasury have indicated they are working toward issuing final regulations by the end of October 2020. Before final regulations are issued, organizations may rely on Notice 2018-67, the proposed 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.

© Clark Nuber PS, 2020. All Rights Reserved

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