Interim Guidance Released On Separate Reporting of UBI
The Treasury Department issued interim guidance covering one of the provisions of the Tax Cuts and Jobs Act (TCJA) with the greatest impact on exempt organizations: the separate reporting of taxable income from unrelated trades or businesses. Under the TCJA, organizations with unrelated business income (UBI) from more than one trade or business must calculate taxable income separately for each trade or business for tax years beginning after December 31, 2017 under the newly-created Internal Revenue Code (IRC) §512(a)(6). This means a net loss from one unrelated trade or business may not offset net income from another unrelated trade or business. But the text of the TCJA as passed by Congress provided no clarity on what constitutes a separate trade or business.
Under the new guidance in Notice 2018-67 (the Notice), organizations may rely on a “reasonable, good-faith interpretation” of the relevant sections of the IRC in determining whether they have more than one trade or business. Importantly, the Notice specifically identifies the North American Industry Classification System (NAICS) of 6-digit codes to describe business activities as a reasonable, good faith basis for identifying trades or businesses. This means that distinct activities which are described by the same NAICS code may be treated as a single trade or business. For instance, organizations selling commercial advertising in multiple publications may treat “advertising” broadly as a single trade or business, even if the publications have different audiences and are distributed by different media, since “Advertising and related services” is described by a single NAICS code, 541800, in the instructions to Form 990-T.
Organizations with UBI resulting from minority partnership interests also received some much-needed insight into the application of the TCJA. It was previously suggested that, due to the pass-through nature of partnership income which retains its character to the partner, exempt organizations holding multiple partnership interests could be required to separately calculate income from partnerships and their underlying holdings engaged in different trades or businesses. However, the interim guidance allows organizations to combine certain partnership interests into a single activity for the purpose of §512(a)(6), allowing organizations to aggregate net UBI from these partnerships. In order to qualify for this treatment, partnership interests must meet either a de minimis test (the organization holds no more than 2% of the capital and profits interest in the partnership) or a control test (the organization holds no more than 20% of the of the capital interest and does not have control or influence over the partnership).
The Treasury Department also provided commentary related to the application of the TCJA to unrelated debt-financed income, payments from certain controlled entities, certain foreign insurance income, and coordination of pre-2018 and post-2017 net operating loss (NOL) deductions, but stopped short of issuing reliable interim guidance. The IRS is seeking comments from the public on all of the items included in the Notice. The Treasury Department expressed its intent to issue proposed regulations on the items covered by the Notice, but no timeline was provided.
If you have questions regarding the Notice, or any other provisions of the TCJA, please contact us.