3529 / Did the 2017 tax reform legislation make any changes to the rules for calculating unrelated business taxable income (UBTI) in the tax-exempt entity context?

Editor’s Note: The Taxpayer Certainty and Disaster Relief Act of 2019¹ repealed the expansion of the UBTI definition. The repeal was made retroactive to the date of enactment, so it is essentially as though the new provision never existed. However, organizations can file an amended Form 990-T to claim a refund for taxes paid under the repealed provision. The rules discussed below reflect the rule as it would have stood had the repeal not happened.

The 2017 tax reform legislation created a new IRC Section 512(a)(6) requirement that tax-exempt entities now separately compute unrelated business taxable income (UBTI) for each trade or business, so that losses from one business can no longer be used to offset gains in another business. In interpreting this new rule, several questions arose that the IRS began to address in Notice 2018-67.

Notice 2018-67 makes clear that the IRS will not penalize entities for using any reasonable good faith interpretation of the statute in calculating UBTI, and requests comments on implementation of the new rules. The Notice proposes that entities distinguish between their trades and businesses by using the codes provided by the North American Industry Classification System (NAICS) in order to aggregate certain business lines.

The notice also requests comments on the IRS’ proposal to create a separate category of “business” for gains and losses generated from partnership investments. Notice
2018-67 contains a safe harbor for organizations to rely upon in the meantime. Under the safe harbor rule, organizations can aggregate income from a single partnership that conducts multiple trades or businesses if the holdings are qualified partnership interests. Gains and losses from all qualifying partnership interests can also be aggregated under the safe harbor. A “qualifying partnership interest” for this purpose is an investment that satisfies one of the following tests:

De minimis test where the organization has no more than a 2 percent interest in the profits and capital of the partnership, or

Control test, where the organization has no more than a 20 percent interest in the partnership and does not exert any control or influence over the partnership.

A transition rule allows aggregation of all income from a single partnership as one trade or business if the interest was acquired before August 21, 2018 (although aggregation across partnerships is not addressed).

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Planning Point: After enactment of the 2020 law, UBTI now will not include amounts paid for (1) qualified transportation fringe benefits, (2) parking facilities used in connection with qualified parking or (3) on-premise athletic facilities, if the amounts are not paid in direct connection with an unrelated trade or business regularly conducted by the organization.

With respect to other fringe benefits, an IRS official has commented on the link between the IRC Section 274 expensing rules and the Section 512 UBTI. The official noted that tax-exempts should look to the Section 274 allowances to determine whether they are offering a fringe benefit that would become subject to the UBTI.

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