The Trump administration is close to finalizing guidance on the unrelated business income “siloing” provision enacted as part of the 2017 tax law.
According to Bloomberg BNA (subscription required), the White House review office has been studying the IRS proposed rules issued in 2018, signaling that final guidance could be released soon.
The change in reporting requirements stipulates that tax-exempt organizations can no longer combine all of their unrelated business activities on their Form 990-T. Instead, they must separately report each activity not substantially related to the tax-exempt mission, paying tax only on those that generate income. This change prevents tax-exempt groups from using the loss from one unrelated business activity to offset the income from another unrelated business activity.
Nonprofits have pushed for guidance on this tax provision because Congress was not clear in the tax law what constitutes a separate activity or how to allocate expenses on their 990-Ts. For example, if certain employees work on exempt purpose-related activities and also on unrelated business activities, how should their time be allocated?
In its 2018 interim guidance on the siloing provision, the IRS acknowledged that in enacting the Tax Cuts and Jobs Act, “Congress did not provide criteria for determining whether an exempt organization has more than one unrelated trade or business or how to identify separate unrelated trades or businesses for purposes of calculating UBTI.”
The IRS suggests that nonprofit groups rely on a “reasonable, good faith interpretation” of the statute in determining whether they have more than one unrelated trade or business. The IRS also cites the “fragmentation principle” in the tax code which states that an activity “does not lose its identity as a trade or business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of an organization.”