IRS Issues Final Rules for Nonprofits With Multiple Revenue Streams

by Katy Brown, Matt Petroski
December 14, 2020

On November 19, 2020, the IRS issued Final Treasury Regulations (entered into the Federal Register on December 2, 2020) on Internal Revenue Code (IRC) section 512(a)(6) for the Unrelated Business Taxable Income (UBTI) siloing rules that were included in the Tax Cuts and Jobs Act of 2017. These regulations confirm and modify the guidance originally issued in IRS Notice 2018-67 and the Proposed Treasury Regulations issued April 24, 2020.

The regulations did reserve two issues to be addressed later:

  1. The allocation of expenses including depreciation and other similar items between exempt and UBI activities.
  2. Interplay with IRC Section 172 Net Operating Loss (NOL) deductions changes in the CARES Act.

Here are some of the key highlights and changes:


  1. Confirmation that an exempt organization (EO) may group activities using the first two digits of the NAICS code.
  2. If an EO determines that an activity is best described by different NAICS codes based on facts and circumstances, they should be separated into two or more unrelated trades or businesses (UTB).
  3. An organization cannot use a NAICS code that reflects their exempt purpose (e.g., schools can’t use education).
  4. Confirmation that different geographies can be aggregated into one UTB.
  5. EOs can change the NAICS code for an activity when: a) there was an unintentional error (e.g., number transcription) or b) EO shows that another code more accurately describes the trade or business. Changes can be made by reporting in accordance with the forms and instructions:
    1. ID separate UTB from the previous year
    2. ID separate UTB in the current year
    3. Provide a reason for the change
  6. Form 990-T instructions will be revised.
  7. Clarifies that an expense allocation isn’t reasonable if the costs of providing goods/services for program-related and UTB activities is the same but a disproportionate amount of expenses are allocated to the UTB.
  8. Social clubs can’t use NAICS code 71 (golf course and country clubs) for all activities.
  9. Charitable contributions – the 10% limitation is calculated based on UBTI after applying the siloing rules.
  10. NOL – confirmed that pre-2018 NOLs are to be utilized before post-2017 NOLs, but the regulations permit allocation between separate UTBs in a manner that allows for the maximum utilization of post 2017 NOLs in a taxable year.
  11. The sale, transfer or termination of a UTB suspends the NOLs, but they can be used later if the UTB is resumed.
  12. Public support test – EOs can choose to calculate UBTI for the public support test in the most advantageous way, either as calculated using pre-512(a)(6) rules (pre-silo) or as calculated on the 990-T under 512(a)(6) rules (post-silo).


  1. Payments from controlled entities (512(b)(13)) and certain amounts derived from foreign corporations (512(b)(17)) are not considered investments.
  2. De Minimis test remains the same, but the “control test” has been renamed the “participation test.” There is a slight modification of the participation test to exclude unanimous voting requirements or minority consent rights from the definition.
  3. There is a grace period of one year when the partnership interest goes over either test’s threshold due to actions of someone other than the EO.
  4. The transition rule for interests acquired prior to August 21, 2018, is not a grandfather rule. The IRS believes that EOs have had sufficient time to address these issues.
  5. Provides greater clarity as to how the Qualified Partnership Interest (QPI) is defined. QPIs may be siloed together regardless of the underlying activity.
  6. A QPI that becomes a non-QPI in a later year is treated as terminated. The non-QPI is treated as a new activity in the year of change.

The Takeaway: There is complexity to these regulations, so EOs should review the regulations in detail, particularly if they have investments that generate UBTI. Overall, we suggest you carefully consider the impact of these regulations on your organization with your stakeholders, including the board, counsel or other advisors. For questions or more information, feel free to contact our experts.

December 14, 2020

Stay In Touch

Sign up to stay up-to-date with the latest accounting regulations, best practices, industry news and technology insights to run your business.

Related News & Insights
Sage Transform VIP Experience
Live Event
VIP luncheon for top finance executives attending Sage Intacct 2022.

October 12, 2022 | 09:30 AM - 10:45 AM PT
Women in Life Sciences: Women’s Health & Wellness
Spill the Tea With Delphine O’Rourke on the State of Women’s Health

October 11, 2022 | 02:00 PM - 03:30 PM PT
ASC 842: Lessons Learned From Early Adopters
Get the scoop from early adopters who have implemented ASC 842.

October 6, 2022 | 09:00 AM - 10:00 AM PT