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Tuesday, April 28, 2020

IRS issues much anticipated Proposed Treasury Regulations to UBTI Siloing Rules


On April 23rd, 2020 the IRS released the highly anticipated Proposed Treasury Regulations on the unrelated business taxable income (UBTI) siloing rules in accordance with changes made by the 2017 Tax Cuts and Jobs Act. In addition, the regulations and explanation summary provide details on other aspects of UBTI calculation. Here is a summary of some of the key areas:

  • The Department of Treasury (Treasury) has accepted the public suggestion to adopt the first-2-digit NAICS code approach for the purpose of aggregating unrelated trades or businesses as opposed to the more burdensome 6-digit code that was presented in the interim guidance (IRS Notice 2018-67).
  • Organizations with unrelated trades or businesses in multiple regions do not have to break the activities out by geographical region if they fall within the same NAICS 2-digit codes; rather all activities worldwide that can be grouped within the same first two digits of the NAICS code may be grouped together for calculating UBTI.
  • Treasury did not adopt a de minimis exception for siloing non-investment activities – all different activities must be reported separately, no matter how small.
  • Treasury determined that the unadjusted gross-to-gross allocation method for allocating expenses is not reasonable, but also requested comments regarding the reasonableness of other allocation methods between related and unrelated activities and between two or more separate trades or business.
  • Investment activities that may be grouped together are limited to: (i) qualifying partnership interests, (ii) debt-financed properties (with some exceptions that require a 2-digit NAICS code grouping), and (iii) qualifying S Corporation interests. Treasury and the IRS will continue to consider whether the term “investment activities” can be better defined in a way that can be administrable and consistent with legislative intent.
  • An exempt organization that holds investments in partnerships may still group together all partnership investment interests for this purpose if it has 2% or less ownership, or if it has 20% or less and lacks control over the partnership (qualifying partnership interests or QPI).
  • If the organization’s ownership in an investment partnership exceeds 20%, it must look through to any lower-tier partnerships to silo trades or businesses. However, if the partnership investment exceeds 20% (without control), then the look-through rules allow the organization to treat the lower-tier partnership as a QPI if its attributed profits and capital interest is 2% or less.
  • Other investment activities are not identified under NAICS 2-digit codes, but rather, treated as a separate trade or business.
  • An organization can rely on the Schedule K-1 it receives from a partnership if it lists the exempt organization’s percentage profits interest, its capital interest, or both at the beginning and end of the year.
  • Special rules were provided for social clubs, VEBAs, and supplemental unemployment benefit trusts.
  • Transition rules: First, the proposed regulations permit an exempt organization to rely on the transition rule (partnership interests acquired prior to August 21, 2018 are treated as one trade or business) only until the first day of the organization’s first taxable year beginning after the date these proposed regulations are published as final. Second, the proposed regulations provide that an exempt organization may apply either the transition rule or the look-through rule, but not both, to a partnership interest that meets the requirements for both rules.
  • Charitable contribution deductions will now be calculated after aggregating income from all trades or businesses and will be deduction against total UBTI.
  • Pre-2018 NOLs are to be deducted before post-2017 NOLs with regard to separate trades or business. Previous guidance suggested post-2017 NOLs would applied first, up to the 80% income limitation per trade or business.
  • The CARES Act temporarily repealed the 80% income limitation on post-2017 NOLs and permits a carryback of NOLs generated in tax years beginning after 12/31/17 and before 1/1/2021. Treasury and the IRS are considering the impact to siloing and may issue additional guidance.
  • IRS Form 990-T and instructions will be updated as appropriate.
  • The definition of an unrelated trade or business under Section 513(b) now applies to IRAs, thus requiring IRAs to determine whether or not it has participated in more than one unrelated trade or business according to section 512(a)(6).
  • Treasury and the IRS are allowing exempt organizations to net all income/losses from unrelated trades or businesses when calculating the public support test on Form 990 Schedule A.

We’re here to help

We’re closely monitoring any changes to the UBTI Treasury regulations proposed by the IRS, and we will send out updates as they become available.

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