Friday, November 20, 2020
The IRS yesterday issued final regulations under Internal Revenue Code section 512(a)(6) relating to the 2017 statutory requirement that exempt organizations silo their unrelated trades or businesses for various purposes, including the use of the net operating loss (NOL) deduction. The final regulations for the most part track the proposed regulations, including by:
- Continuing to use the first two digits of the North American Industry Classification System (NAICS) code to identify separate trade or businesses, without the additional option of a facts and circumstances test. The final regulations do add some additional guidance regarding how to identify the appropriate NAICS code for a particular trade or business, including use of the descriptions provided by more specific NAICS codes, and they also now permit changing NAICS codes, subject to reporting that change to the IRS.
- Continuing to reject a de minimis exception as outside the authority granted under the statute and inconsistent with congressional intent.
- Continuing to require allocation of deductions between unrelated trades or business on a reasonable basis standard, with some further guidance provided relating to allocation.
- Continuing to treat investment activities that are subject to the unrelated business income tax as a separate unrelated trade or business, with some minor clarifications and modifications relating to partnership and S corporation interests .
In response to comments received, the final regulations do make some technical modifications relating to the use of NOLs and to how UBTI is calculated for purposes of the public support tests under Internal Revenue Code sections 509(a)(1)/170(b)(1)(A)(vi) and 509(a)(2).
Also tracking the proposed regulations, the final regulations leave two significant issues outstanding but with future guidance promised to address them:
- The allocation of expenses, depreciation, and similar items shared between an exempt activity and one or more unrelated trades or businesses or between more than one unrelated trade or business.
- Application of the changes made to the Internal Revenue Code section 172 NOL deduction by the CARES Act.
The new regulations are effective as of the date of publication in the Federal Register.