Final regs. govern computation of UBTI for separate businesses

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Final regs. govern computation of UBTI for separate businesses

The IRS posted an advance copy of final regulations that provide guidance on how an exempt organization subject to the unrelated business income tax (UBIT) determines if it has more than one unrelated trade or business (T.D. 9933). The regulations also discuss how an exempt organization calculates unrelated business taxable income (UBTI) if it has more than one unrelated trade or business.

T.D. 9933 finalizes, with modifications, regulations that were proposed in April (REG-106864-18).

Under Sec. 512(a)(6), enacted by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, tax-exempt organizations subject to tax on UBTI must calculate UBTI separately for each business — or “silo” revenue and expenses for each separate business.

The final regulations provide that an exempt organization with more than one unrelated trade or business must compute UBTI separately with respect to each unrelated trade or business, without regard to the specific deduction in Sec. 512(b)(12), including for purposes of determining any net operating loss (NOL) deduction. The regulations generally provided that an exempt organization must identify each of its separate unrelated trades or businesses using the first two digits of the North American Industry Classification System code (NAICS 2-digit code) that most accurately describes the unrelated trade or business.

An exempt organization with more than one unrelated trade or business must allocate deductions between separate unrelated trades or businesses using the reasonable-basis standard described in Regs. Sec. 1.512(a)-1(c).

The final regulations treat an exempt organization’s investment activities that are subject to UBIT as a separate trade or business for purposes of Sec. 512(a)(6). However, qualifying partnership interests, qualifying S corporation interests, and certain debt-financed properties may be treated as separate unrelated trades or businesses for purposes of Sec. 512(a)(6).

April’s proposed regulations had reserved two issues for further consideration: The first involves the allocation of expenses, depreciation, and similar items that are shared between an exempt activity and an unrelated trade or business or between more than one unrelated trade or business. The second issue relates to changes made to the Sec. 172 NOL deduction by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The IRS anticipates issuing proposed regulations on these issues in the future.

The regulations have been sent to the Federal Register for publication and will be effective on the date of publication.

Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor in chief, tax.

Research & References of Final regs. govern computation of UBTI for separate businesses|A&C Accounting And Tax Services
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