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.
Treasury may provide guidance through this mechanism because the Internal Revenue Code gives the Form 990 and its instructions authority similar to Treasury regulations, without the requirement of going through the change process necessary to issue new regulations. The following are some high-level observations:
- The 990-T header has changed so an organization now indicates how many separate trades or businesses it has on line H. The organization will also provide a NAICS code for its “primary” unrelated activity with a description of the primary activity. How the primary is measured is not yet known. Is it the largest by gross or net revenue? Perhaps most significant by some other measure? Can the organization choose?
- It is clear there will be a new Schedule M required for organizations that have more than one unrelated trade or business. However, no Schedule M or instructions have been released yet. It is likely this Schedule will report each separate trade or business and all direct expenses and allow for the carryforward of any losses not allowed to offset income from other segregated trade or business activities.
- Finally, we know taxable fringe benefits are added at the bottom on line 34, after other ordinary and necessary business expenses have been deducted, such as tax preparation fees, legal fees, and the charitable contribution deduction. It is after current and subsequent net operating losses generated in current and subsequent tax. This is different from the 990-T 2017 where the UBTI is reported above expenses. Regardless of the amount of additional UBTI, if this is the only reason for filing the Form 990-T, organizations need only complete the Header above Part I, except C, E, H, and I; Part III and IV – only the relevant lines; and the signature lines. For both years 2017 and prior, net operating loss carryforwards are allowed to offset the UBTI generated by qualified transportation fringe benefits
The IRS issued Notice 2018-67 with guidance on segregating and suspending losses. The new IRS section 512(a)(6) requires reporting separate trades or businesses on the yet-to-be-published Schedule M. For the other new code section 512(a)(7), many organizations are still awaiting guidance on how to calculate the “cost” of providing parking benefits when parking is provided in an employer owned parking facility. For both of the new Code sections, organizations will need to prepare a reasoned tax position based upon available guidance.
If you have questions or need assistance calculating unrelated business income tax, please contact your tax advisor or the tax professionals at Clark Nuber.
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