IRS proposes rules for unrelated business income for tax-exempt groups

The Internal Revenue Service and the Treasury Department issued proposed regulations Thursday to offer guidance for tax-exempt organizations who are subject to the unrelated business income tax provisions of the Tax Cuts and Jobs Act about how to calculate their unrelated business taxable income if they have more than one unrelated trade or business.

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”.

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 (that is, tax years beginning after Dec. 31, 2017), the loss from one trade or business may not offset the income from another, separate trade or business.

Separately on Thursday, the IRS posted new Frequently Asked Questions (FAQs) about carrybacks of net operating losses for taxpayers who have had Section 965 Inclusions. The FAQ page follows up on the temporary procedures the IRS issued last week for faxing forms to the IRS after passage of the CARES Act late last month. The $2.2 trillion stimulus package amended section 172(b)(1) of the Tax Code to provide for a carryback of any net operating loss (NOL) arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to each of the five taxable years preceding the taxable year in which the loss arises. The FAQ explains matters such as how to apply for tax refunds for those years, waive the carryback or exclude certain years.

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