Changes to Form 990-T after Tax Cuts and Jobs Act (TCJA).
The TCJA made several changes that affected exempt organizations Form 990-T. These changes are effective for the 2018 tax year.
Non-profit organization with unrelated business income (UBI) in excess of $ 1,000 is required to file annual form 990-T.
Unrelated business income is the gross income from any unrelated trade or business regularly carried on, minus business deductions directly connected therewith.
Taxation of Unrelated Business Income
Although the non-profit organization may have tax exempt status, it may become subject to regular corporate income tax on income from a business or trade that is not related to its tax-exempt purpose. This income from unrelated trade or business is called unrelated business income.
Tax exempt organization with unrelated business taxable income (UBTI) is subject to tax and is required to file a Form 990-T and must also comply with code provisions regarding installment payments of estimated income tax by corporations.
The new enacted tax law (TCJA) changed how the exempt organizations determine the unrelated business taxable income (UBTI). Section 512(a)(6) of Internal Revenue Code, require organization with one or more unrelated trade or business to determine UBTI for each trade or business separately without regard to the specific deduction under Section 512(b)(12)). Then, subtract the deduction under Section 512(b)(12)) ( allowing a specific deduction of $1,000), from the sum total of the amounts calculated.
This is a departure from the prior law where UBTI was calculated as the gross income of all unrelated trades or businesses less the allowed deductions from all unrelated trades or businesses.
Notice 2018-67 provides interim guidance and transition rules under section 512(a)(6) on which exempt organizations may rely on pending publication of proposed regulations.
Another significant change, the exempt organizations are not allowed to use loss, including the net operating loss, from one trade or business to offset the income from a separate trade or business.
TCJA also imposes tax on qualified transportation and qualified parking fringe benefits, and any on-premises athletic facilities. Which means fund used to pay for these benefits will be treated as unrelated business taxable income, provided the amounts are not deductible under Section 274.
In addition, significant changes were made to international tax rules. A newly revised section 965 imposes a one-time transition tax on a 10% US shareholder’s pro rate share of foreign corporation’s accumulated post-1986 deferred foreign income.
The Changes in Reporting UBTI
With the changes in TCJA the exempt organizations are now required to list the number of the organizations trades or businesses. If the organization has more than one trade or business, the organization is required to complete a schedule M for each unrelated trade or business before completing the new Part III (Total Unrelated Trade or Business).
The interim guidance under notice 2018-67 provides that exempt organizations may rely on a reasonable, good-faith interpretation of sections 511 through 514 when determining whether an exempt organization has more than one unrelated trade or business.
The Internal Revenue Service (IRS) through Notice 2018-67 also solicits comments which means, the IRS is more likely to make more clarification under § 512(a)(6 when they published the proposed regulations.
For more information, contact a tax professional at mercy@mercynjengacpa.com