IRS Issues Final Regulations: UBIT and Calculating UBTI for Separate Unrelated Trades and Businesses

The IRS recently issued final regulations that provide exempt organizations subject to the unrelated business income tax (UBIT) with guidelines for determining whether their organization is made up of more than one unrelated trade or business and, for those that in fact are, how unrelated business taxable income (UBTI) is calculated.

What are the key takeaways from the final regulations on UBTI?

Under the Tax Cuts & Jobs Act of 2017 (TCJA), revenue and expenses for each separate business for a tax-exempt organization subject to UBIT must be “siloed,” meaning UBTI must be calculated separately for each business. The IRS’s final regulations amend the TCJA legislation by adding that, for those subject to UBIT with more than one unrelated trade or business, UBTI must be calculated using the reasonable-basis standard, “separately with respect to each such trade or business including for purposes of determining any net operating loss (NOL) deduction.”

In agreement with proposed regulations from earlier this year, the final regulations allow exempt organizations to identify each separate unrelated trades or businesses by choosing the North American Industry Classification System code that most accurately describes said unrelated trade or business and using only the first two digits of the code. 

The regulations clarify that “unrelated trade or business” also applies to individual retirement accounts and that subpart F and global intangible low-taxed income (GILTI) are treated “in the same manner as dividends for purposes of determining unrelated business taxable income.” So, in general, the final regulations treat investment activities subject to UBIT as a separate trade or business; however, there are a number of specific considerations, especially for certain partnership and S corporation interests, as well as certain debt-financed properties.

What related matters are not covered in the final regulations?

The IRS recognizes that the final regulations do not fully address previously proposed questions and concerns on related allocation of expenses, depreciation, and similar items, nor do they address the changes the CARES Act legislation made to the TCJA §172 NOL deduction. In conjunction with the US Treasury, the IRS is likely to issue a separate notice to address these issues.

Contact ARB

ARB’s Nonprofit Services Group provides nonprofits with the tools they need to understand and comply with new and evolving legislation and guidance. Contact us for more information on UBTI. Please also visit our COVID-19 Financial Resource and Tax Center for additional information on related matters.

 

by Jason C. LeBlanc, CPA