Guidance For Tax Exempts With Unrelated Business Income

The IRS and the Treasury issued proposed regulations for tax-exempt organizations who are subject to the Unrelated Business Income Tax provisions of the TCJA. UBTI applies to any activities a nonprofit engages in that aren’t related to the tax-exempt purpose of the organization. We now have more clarity on how non-profits should calculate taxes owed on income they earn from activities that diverge from their core mission. The proposed regulations explain how to identify the separate trades or businesses, including investment activities, as well as certain other amounts included in UBTI.

Some of the provisions of the 2017 tax overhaul require tax-exempt organizations that are subject to the UBTI tax to compute the income they derive from their businesses, including any net operating loss deduction, separately for each trade or business, which is referred to as a “silo.” Certain exempt organizations may conduct an unrelated trade or business directly or indirectly through another entity, which has an impact as well.

Before the TCJA was passed in December 2017, UBTI was the gross income of all unrelated trades or businesses minus the allowed deductions from all unrelated trades or businesses. Starting in tax-year 2018, the loss from one trade or business may not offset the income from another, separate trade or business.

Specifically, in the case of any exempt organization with more than one unrelated trade or business:

Thus, an exempt organization is no longer permitted to aggregate income and deductions from all unrelated trades or businesses when calculating UBTI. This applies to taxable years beginning after December 31, 2017, but not to NOLs arising before January 1, 2018, that are carried over to taxable years beginning on or after such date.

Reach Out To US: Fuoco Group’s not-for-profit division provides tax and audit services for many charitable entities and non-profits, including many professional organizations and Chambers of Commerce. If you are a non-profit we can also assist you with your annual compliance needs as well as the calculations for your Unrelated Business Taxable Income and for Net Operating Losses.