Final Regulations Issued for Unrelated Business Income Activities
Final regulations were recently published in the Federal Register, providing guidance and clarity on the calculation of unrelated business income (UBI) for exempt taxpayers operating more than one unrelated trade or business.
The final regulations under 512(a)(6) apply to tax years beginning after December 2, 2020. For tax years before December 2, 2020, an organization may rely on the guidance published in Notice 2018-67, the Proposed Regulations or the Final Regulations. The most significant differences in the three pieces of guidance are discussed below.
Background on Unrelated Business Income Activities
Section 512(a)(6) was added by the Tax Cuts and Jobs Act of 2017 and applies to tax years beginning after December 31, 2017. Section 512(a)(6) requires exempt organizations to separately calculate unrelated business income for each unrelated trade or business, commonly referred to as “silos.” Prior to the enactment of Section 512(a)(6), an exempt organization was able to aggregate income, expenses and deductions from all unrelated trade and business activities to calculate their taxable income. This allowed a loss from one unrelated trade or business activity to offset income from another unrelated trade or business, reducing total taxable income.
Interim guidance was released by the IRS in August of 2018 via Notice 2018-67. The interim guidance indicated that a taxpayer could use a “reasonable, good-faith interpretation” of the statute and also provided preliminary guidance and transitional rules for exempt organizations. The Notice allowed the use of 6-digit NAICS codes as an acceptable method of classifying business activities. In addition, the Notice introduced the concept of an “investment silo,” providing guidance for the treatment of investment partnership interests.
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