April 30, 2020
Proposed Regulations on Separate Reporting of UBI Released
The Department of the Treasury and the Internal Revenue Service (IRS) issued proposed regulations on Friday, April 24, which provide additional guidance on the separate reporting and calculation of income from unrelated trades or businesses under Section 512(a)(6), as enacted by the Tax Cuts & Jobs Act.
In general, the separate reporting of unrelated business income requires exempt organizations with more than one trade or business to report income and losses from each activity separately, meaning that losses from one activity can not offset gains from another. However, neither the plain language of the statute nor any other provisions in the Internal Revenue Code or regulations provide any guidance as to how distinct two activities must be in order to be “separate” for this purpose.
Interim Guidance released in September of 2018 (Notice 2018-67) provided a general scheme for identifying separate trades or businesses based on the North American Industrial Classification System (NAICS) hierarchical system and for aggregating certain minority partnership interests. In particular, the interim guidance indicated the usage of the very-specific 6-digit NAICS codes to identify separate trades or businesses. The proposed regulations, however, adopt the usage of the first two-digits of the NAICS codes to identify separate trades or businesses. This allows taxpayers to combine significantly more otherwise-separate activities into a single separate trade or business. For example, an exempt organization which sells advertising in its monthly periodical (NAICS code 541890) and which provides back-office accounting and administrative services for an unrelated organization (NAICS code 541219) would have reported two separate activities using 6-digit codes. Therefore, under the proposed regulations, the organization will combine them into a single activity, NAICS Code 54, “Professional Services”. This means that losses from the advertising activity may offset income from the accounting services.
The proposed regulations otherwise retain the substance of the interim guidance, including allowing organizations to combine income from partnerships in which the organization either owns less than 2% of the capital or profits interest, or owns less than 20% of the capital or profits interest and does not exercise control over the partnership. This provision prevents the burdensome situation of having to consider each partnership interest as a separate business activity, or worse having to separate each underlying activity for each separate partnership, then aggregate those activities using the 2-digit NAICS codes.
One piece of guidance missing from the proposed regulations concerns the interplay of the separate reporting of unrelated trades or businesses and the modified net operating loss (NOL) carryback rules introduced by the CARES Act. Under the Tax Cuts & Jobs Act, NOLs must be calculated separately for each trade or business, and may not be carried back to prior years. However, the CARES Act temporarily allows a 5-year carryback of NOLs generated in tax years 2018, 2019, and 2020. It is unclear how a separately-calculated NOL is to be carried back to an earlier tax year in which separate reporting was not required. The preamble to the proposed regulations acknowledges that guidance is needed on this point, but stopped short of providing it.
If you have any questions related to this or any other topic, please reach out to the Johnson Lambert Team.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.