2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

TCJA: WHAT CHANGED FOR TAX-EXEMPT ORGANIZATIONS

Almost two years after the Tax Cuts and Job Act (TCJA) was signed into law in December 2017, important and much-needed guidance from the Internal Revenue Service is slowly trickling in. This article summarizes which laws changed for tax-exempt organizations and the updates available as of this writing.

UNRELATED BUSINESS INCOME TAX Pre-Act Law Tax-exempt organizations previously determined their unrelated business taxable income (UBTI) by calculating gross unrelated business income and subtracting any deductions directly from the unrelated trade or business. In calculating UBTI, organizations with multiple separate unrelated trades or businesses were permitted to offset income from one unrelated trade or business with the deductions from another, to reduce their overall UBTI. New Law The UBTI silo rule requires a tax-exempt organization to compute UBTI separately with respect to each unrelated trade or business of the organization, effective for tax years beginning after December 31, 2017. Now, UBTI is calculated by disallowing the application of losses from one unrelated trade or business to offset income from a separate unrelated trade or business. The new rule prevents tax- exempt organizations from offsetting UBTI generated by a profitable unrelated trade or business with a loss from an unprofitable one. The IRS has provided little or no guidance other than stating that taxpayers should rely on a “reasonable good faith interpretation.” Therefore, until further guidance is provided, IRS states it would be acceptable to rely on the North American Industry Classification System (NAICS) 6-digit codes. So, in effect, if multiple unrelated trades or businesses are described by the same NAICS code, they could be treated as one trade or business for purposes of determining the nonprofit’s UBTI.

In addition, the IRS provided interim and transition rules for aggregating partnership interests and activities for purposes of the UBTI grouping rule. n Tax-exempt organizations may aggregate UBTI from an interest in a single partnership that reports multiple trades or businesses, including trades or businesses conducted by lower-tier partnerships, as long as the directly held interest in the partnership meets the requirements of either of the following:; 1. De Minimis Test. The tax-exempt organization directly holds an interest of no more than 2 percent of the profits and no more than 2 percent of the capital interest in a partnership. 2. Control Test. The tax-exempt organization (1) directly holds no more than 20 percent of the capital interest in a partnership and (2) does not have "control or influence" over the partnership. Whether a tax-exempt organization has "control or influence" over the partnership is determined by facts and circumstances. For both tests, the interest of a disqualified person, a supporting organization, or a controlled entity (within the meaning of Section 512(b)(13)) in the same partnership will be taken into account in determining the tax-exempt organization’s percentage interest. n Tax-exempt organizations may treat a partnership interest acquired before August 21, 2018, as constituting a single trade or business, whether or not the partnership (or any lower-tier partnership) directly or indirectly conducts more than one trade or business.

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