Sept. 21, 2018 – The Treasury Department and Internal Revenue Service have issued a Request for Comments on proposed interim and transition rules (Notice 2018-67) for interpreting they way that nonprofits calculate UBIT payments. The new Section 512(a)(6) of the Internal Revenue Code changes the way nonprofits calculate UBIT; instead of aggregating all of their profits and losses from unrelated business activities, nonprofits must now "silo" their revenues and expenses for each "separate" "trade or business" and pay UBIT on each. Neither of the quoted terms is defined in the law. The proposed rules released last week provide some clear answers and instructions on how to comply with the law immediately, but many questions remain that must be resolved during the formal rulemaking process.
The Notice expressly provides that starting on January 1, 2018 (when the tax-law provision took effect) until issuance of final regulations (probably in 2019) nonprofits may rely on a reasonable, good faith interpretation of the UBIT statutes in determining whether their organizations have more than one "trade or business." Specifically, the IRS suggested using the North American Industry Classification System (NAICS) 6-digit codes as a reasonable, good faith interpretation. Practically, this means that nonprofits can combine the revenue and expenses from all advertising activities (e.g. online advertising and ads in a variety of print publications) into one category (NAICS code 541800), since these would all be within the same NAICS code. But the NAICS code may not provide clarity for some or many other sources of revenue and expenses. For example, the NAICS has multiple codes relating to rentals. Consequently, rental income and expenses may need to be divided or grouped in other ways, meaning it’s possible that expenses for some types of rentals may not be used to offset income from other types.
A separate question arises when a nonprofit has an ownership interest in a partnership that engages in many “trades or businesses.” For now, the IRS will treat revenue from a partnership as a single "trade or business" if one of two tests is satisfied: the de minimis test (ownership interest of no more than 2%) or the control test (no more than 20% ownership interest and no control over the operations of the business). Revenue from other forms of partnership interests that fail to meet these tests can still be treated as a single "trade or business" during the one-year transition period that runs from August 21, 2018 to August 21, 2019.
The notice made only a passing reference the UBIT on commuter benefits, found in Section 512(a)(7). The government has given no indication if or when it will delay implementation of the controversial new tax (effective January 1, 2018) or provide guidance to the hundreds of thousands of nonprofits affected by the tax change.
YOU CAN TAKE ACTION
Go to the IRS public comment form and insist that Treasury and the IRS delay implementing the new UBIT subsections until one year after Final Rules are promulgated. (Fill in "Form 990-T" in the line: Form/Instruction/Publication Number.) Learn more.
The Notice provides a way for nonprofits to comply with the new law and the opportunity to recommend changes to the proposed rule that fix any shortcomings. The first step for any nonprofit potentially affected by this tax is to review the NAICS codes and compare your unrelated business revenue streams to determine which categories apply neatly, and which codes don’t make sense. Treasury and the IRS need to know what works and what parts of their proposed rule must be revised. You can make recommendations by submitting public comments via email to [email protected] with reference to Notice 2018-67 in the subject line. The public comment period is open through December 3, 2018. See tips for submitting public comments. (From the National Council of Nonprofits.)