The Tax Cuts and Jobs Act of 2017 enacted into law last year included a hidden “gem” for not-for-profit organizations with unrelated business tax income (UBTI); tax-exempt organizations are now required to calculate UBTI separately for each trade or business. Prior to enactment, an organization’s UBTI was the aggregate income from all such trade or businesses reduced by the aggregate deductions for all such trade or businesses. Under the new law, the “sharing” of deductions between separate trades or businesses that generate UBTI is no longer allowed.
The proposed regulations released by the Internal Revenue Service (IRS) indicated that an organization that reports UBTI from more than one unrelated trade or business activity would be required to file a 990T for each separate trade or business. The effect of this reporting is that expenses from separate trade or businesses are not able to offset income in another trade or business. Organizations must carefully consider if their activities constitute more than one unrelated trade or business and report accordingly going forward.
The new law did not provide criteria for determining whether an exempt organization has more than one unrelated trade or business or how to identify separate unrelated trades or businesses for the purposes of calculating UBTI. Under the proposed regulations (IRS Notice 2018-67), the IRS provided that exempt organizations can use a “reasonable, good-faith interpretation” that considers all the facts and circumstances when attempting to identify separate trades or businesses. One option the IRS considers in the proposed regulations is the use of the North American Industry Classification System (NAICS) codes. The proposed regulations go so far as to indicate that the use of NAICS 3 to 6-digit codes is considered to be a reasonable, good-faith interpretation.
Unfortunately, until the final regulations are released, there will still be ambiguity on how to properly comply with this section of the Tax Cuts and Jobs Act of 2017. If you have any questions regarding your organization’s sources of UBTI, please contact your Hawkins Ash CPAs representative.