By Jake Cook, CPA
The 2018 Internal Revenue Service draft Form 990-T and Instructions were released in October 2018. Due to the tax reform provisions in the Tax Cuts and Jobs Act of 2017, the form and instructions include several necessary revisions.
The significant modifications include:
- Calculation of UBTI (unrelated business taxable income) separately for each business activity (UBTI silos) under Internal Revenue Code (IRC) Section 512(a)(6)
- Treatment of fringe benefits including qualified transportation and qualified parking under IRC Section 512(a)(7)
- Changes to the net operating losses as a result of the amendment to IRC Section 172
- Corporate tax rate change to 21%
- Elimination of the alternative minimum tax (AMT) for corporations.
A summary of these significant provisions follows below.
UBTI Silos – IRC Section 512(a)(6)
Organizations with more than one unrelated business activity are now required to compute UBTI separately for each activity, and a loss from one activity cannot reduce income from another activity. Net operating losses (NOL) will be tracked separately for each activity. The instructions explain that an organization with more than one unrelated trade or business may allocate any charitable deduction among the activities using any reasonable method.
The new Schedule M on Form 990-T should be completed for each unrelated trade or business. The organization will then report the sum of the UBTI on each Schedule M on Line 32 of Form 990-T. To the extent there is a UBTI loss reported on a Schedule M, it cannot be used to offset income on another Schedule M. Rather, this loss will become a NOL available only for future income within the same type of trade or business.
Disallowed Fringe Benefits – IRC Section 512(a)(7)
Under IRC Section 274(a)(4) no deduction shall be allowed for the expense of any qualified transportation fringe, defined in IRC Section 132(f), provided to an employee of the organization. The Form 990-T was modified to include an addition to the total unrelated trade or business income for the amounts paid for disallowed fringe benefits. This addition is before the pre-Jan. 1, 2018 NOL deduction as well as the $1,000 specific deduction; thus, both are available to be used against the disallowed fringe benefits amount recognized as UBTI. With the new limitation of UBTI losses generated for tax years starting after Dec. 31, 2017, these future losses will not be able to be utilized against UBTI from disallowed fringe benefits. The instructions also make it clear that if the only UBTI the organization has is from disallowed fringe benefits, the organization must still file the 990-T if the UBTI is greater than $1,000.
Net Operating Losses – IRC Section 172
Net operating losses generated in tax years ending after 2017 can no longer be carried back two years. Net operating losses can be carried forward indefinitely, however they can only reduce taxable income up to 80 percent.
Corporate Tax Rate Change – Flat 21 Percent
The corporate tax rate was modified from a variable rate based on income to a flat 21 percent rate. Due to the lowest tax bracket starting at 15 percent previously, tax-exempt organizations with UBTI less than approximately $90,000 will actually pay a higher tax with the new 21 percent tax rate.
Repeal of Corporate AMT
There is no longer a corporate level minimum tax and an organization with an AMT credit carryover can treat a portion of the carryover as refundable using Form 8827.
Additional Modifications that may impact Form 990-T as a result of tax reform, with respective form numbers:
- Base erosion minimum tax – Form 8991
- Business interest expense limitation – Form 8990
- Excess business loss limitations for noncorporate taxpayers – Form 461
- Global Intangible Low-Taxed Income (GILTI) – Form 8992
- Foreign-Derived Intangible Income (FDII) – Form 8993
- Deferred foreign income inclusion under Section 965(e) – Form 965
Further guidance from the IRS on implementation of the tax law changes is still pending. Stay tuned for future updates.
For more information, contact Jake Cook, nonprofit tax managing director, at firstname.lastname@example.org.