UBTI and Separate Unrelated Businesses

This morning, the IRS released proposed unrelated business taxable income regulations. (h/t to Law360 and Bloomberg Tax for reporting on the new regs!)

Some context: 2017's TCJA added section 512(a)(6) to the Code. That section says that, where a tax-exempt organization has multiple unrelated trades or businesses, it has to calculate unrelated business taxable income separately for each. Moreover, under that calculation, an organization's UBTI can't be negative. Effectively, then, the TCJA siloed UBTI losses. A tax-exempt organization could carry them forward to future years, but couldn't use them to offset UBTI from a separate trade or business.

The proposed regulations relax that siloing a little. Under the proposed regulations, a tax-exempt organization will determine the first two digits of the North American Industry Classification System for each of its separate unrelated trades or businesses.

Broadly speaking, the NAICS uses six-digit numbers to classify the economy hierarchically. The first two digits represent one of 20 sectors; the third digit designates the subsector, the fourth digit the industry group, etc. By focusing solely on the first two digits rather than digging deeper down the NAICS codes, the IRS lets tax-exempt organizations to treat a wider breadth of unrelated businesses as being the same, and thus makes it more possible for a tax-exempt organization to offset UBTI in one endeavor with losses from another.

Samuel D. Brunson

Picture by Leaflet. CC BY-SA 3.0.