New guidance on the Tax Cuts and Job Act’s unrelated business taxable income changes

Recently, the Internal Revenue Service (IRS) released Notice 2018-67 to provide interim guidance to exempt organizations in calculating unrelated business taxable income (UBI). The Notice addresses taxpayer concerns stemming from a new statutory provision added by the Tax Cuts and Jobs Act (TCJA) requiring exempt organizations to calculate unrelated business taxable income separately for each line of business.

Section 511 of the Internal Revenue Code imposes tax on an exempt organization’s unrelated business taxable income. UBI arises from an exempt organization’s conduct of a trade or business that is not “substantially related” to furthering an organization’s exempt purpose. The TCJA established a new rule for calculating unrelated business taxable income (i.e., the net amount of unrelated business income) that is codified as section 512(a)(6) of the Code. The new provision requires organizations to calculate unrelated business taxable income separately for each trade or business; thus, organizations with more than one trade or business may no longer offset income from one unrelated trade or business with losses from another.

One problem inherent in the statute is identifying what constitutes a separate trade or business for purposes of section 512(a)(6). The Notice essentially provides a safe harbor, allowing exempt organizations to identify separate trades and businesses by reliance on North American Industry Classification codes. The Notice also provides guidance for applying the new unrelated business taxable income rules to income derived from partnership interests held for investment purposes. However, we will still need further guidance from the IRS on how taxpayers must report unrelated business taxable income with multiple lines of business.

Exempt organizations may rely on the Notice for tax years beginning after December 31, 2017, until the IRS releases proposed regulations.