2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

A Busy Year for Nonprofit Tax Guidance

PROPOSED REGULATIONS RELATED TO “SILO” RULES (SECTION 512(A)(6)) On April 23, 2020, proposed regulations were issued related to IRC Section 512(a)(6), which was enacted as part of the 2017 Tax Cut and Jobs Act (TCJA). This code section requires exempt organizations to calculate unrelated business taxable income separately with respect to each of their unrelated trades or businesses, thereby limiting the ability to use losses from one business to offset income from other taxable activities. The proposed regulations included much of the interim guidance provided in previously issued notices. Some takeaways from the proposed regulations include: (i) a simplified process by which to classify various business activities for purposes of determining taxable income; and (ii) relief and guidance in applying certain aggregation rules, which focus on income flowing from various alternative investment structures. One major change in the proposed regulations was the use of two- digit North American Industry Classification System (“NAICS”) sector codes as the primary method for identifying separate trades or businesses, rather than the six-digit codes suggested in the prior notice. This greatly reduced the number of trades or businesses from more than a thousand to a mere 20, which will greatly reduce the compliance burden for many exempt organizations. Under the proposed regulations, all investment activities are treated as a single and separate unrelated trade or business. For this purpose, investment activities are limited to the following three activities only: (i) direct or indirect investments in partnerships designated as “qualifying partnership interests” (“QPIs”), (ii) debt- financed properties, and (iii) qualifying S corporation interests.

GUIDANCE ON NET OPERATING LOSSES (NOLs) The proposed regulations provide that NOLs arising in taxable years beginning after December 31, 2017, are to be applied to each separate trade or business. The TCJA amended Internal Revenue Code section 172, in most circumstances, to eliminate NOL carrybacks, limit net operating losses to 80 percent of taxable income, and allow carryforwards indefinitely. Pre-TCJA taxpayers could generally carry back losses for two years and forward for only 20 years. The Coronavirus Aid, Relief, and Economic Security (CARES) Act modified this code section to address liquidity issues arising from the COVID-19 pandemic by temporarily repealing the 80 percent NOL limitation and allowing deductions for loss carryovers and carrybacks to fully offset taxable income for tax years beginning before January 1, 2021. The law also allows nonprofit companies to carry back losses arising in tax years 2018 through 2020 for up to five years before the year of the loss. The CARES Act made the TCJA NOL rules effective for tax years beginning after December 31, 2020, along with fixing legislative quirks such as the effective date for fiscal-year taxpayers, and clarifying how taxpayers deduct both pre-TCJA and post-TCJA NOLs. PROPOSED EXCESS COMPENSATION REGULATIONS (SECTION 4960) Section 4960 imposes an excise tax on remuneration in excess of $1 million and any excess parachute payment paid by an applicable tax-exempt organization to any covered employee. In December 2018, the IRS issued initial guidance in Notice 2019-9 on the application of section 4960. The proposed regulations issued on June 5, 2020 are generally consistent with that guidance but include changes to address comments. The proposal indicates that federal instrumentalities would be subject to section 4960. It also states that a foreign organization would be treated as an applicable tax-exempt organization (“ATEO”) unless it receives substantially all its support (other than gross investment income) from sources outside the United States.