Unrelated Business Income Taxes (“UBIT”) for tax-exempt organizations were significantly affected by the regulations of the 2017 Tax Act (P.L. 115-97). Under the Tax Act’s Internal Revenue Code Section 512(a)(6), which is effective for taxable years beginning after December 31, 2017, the following new requirements were established:
- UBIT income (including when it is used to determine any net operating loss deduction) is to be calculated separately with respect to each trade or business and without regard to subsection (b)(12).
- UBIT income of such organization is to be the sum of UBIT calculated with respect to each such trade or business less a specific deduction under subsection (b) (12).
- For purposes of subparagraph(B), UBIT with respect to any such trade or business must not be less than zero.
The IRS continues to seek comments on the calculation of UBIT under Internal Revenue Code Section 512(a)(6). Comments are being accepted until the deadline of December 3, 2018 and can be mailed to the address provided in the notice at the link above or emailed directly to the IRS with “Notice 2018-67” in the subject line. Comments are being sought by the Treasury Department and the IRS in the following subject areas:
- The general interim rule to distinguish between trades and business as described in Section 3 of the Notice.
- Whether other Code sections may provide an example for the identification of separate trades or businesses (Section 3.03 of the Notice).
- Whether the North American Industry Classification System (NAICS) 6 digit (or less) codes could potentially be used as a tool to determine separate trades or businesses (Section 3.03 of the Notice).
- General rules for allocating deductions between trades or businesses (Section 3.04 of the Notice).
- Treatment of unrelated income from the financing of debt, specified payments received from controlled entities, and certain insurance income (Section 4 of the Notice).
- Scope of activities to be included under “Investment Activities.” (Section 5.02 of the Notice).
- How income arising out of an investment through partnerships is handled. Section 6 of the Notice provides rules for partnership investments allowing for the aggregation of qualifying partnership interests under de minimis (section 6.02 of the Notice) and control (section 6.03 of the Notice) tests. For interests acquired before August 21, 2018, partnership interest can consist of a single trade or business.
additional considerations that should be given to how IRC Section 512(a)(6)
applies within the context of Section 7 of the Notice. In Section 7,
social clubs, VEBAs and supplemental unemployment compensation benefit trusts
and the current UBTI rules for them are discussed. In Section 8, the
Notice discusses that any amount included in UBIT under IRC section 512(a)(7)
with respect to qualified transportation benefits and parking taxable to the
organization is not considered an unrelated trade or business and is not
subject to IRC Section 512(a)(6).
- How pre-2018 and post-2017 net operating losses (NOL’s) should be calculated and ordered (Section 9 of the Notice).
- How pre-2018 NOLs that will expire in a given tax year if not taken before post-2017 NOLs (Section 9 of the Notice) should be treated.
Note that Section 10 of the Notice clarifies that global intangible low-taxed income (GILTI) will be treated as a dividend which is generally excluded from UBIT.
In October, 2018 the IRS published a draft form 990-T including filing instructions. This draft changes the Form for IRC Section 512(a)6) and requires completion of Schedule M for organizations with more than one trade or business before completing a new Part III regarding total Unrelated Trade or Business. The IRS is accepting comments on the draft form and instructions.