Tax Cuts and Jobs Act Impacts Nonprofit Organizations

The 2017 Tax Cuts and Jobs Act (TCJA) has impacted the nonprofit sector in several areas, one of the most significant being the reporting requirements pertaining to Unrelated Business Income.

Previously, tax exempt organizations who operated more than one unrelated trade or business were permitted to offset the net income of one income stream with the net loss from another. However, under the TCJA, this practice is no longer permitted. Beginning in tax year 2018, a loss from one unrelated trade or business cannot be used to offset the gain from another [IRC Sec 512(a)(6)].

The ramifications of this are that some organizations that previously had no Unrelated Business Income tax liability may now find themselves required to pay tax under the new reporting requirements.

The TCJA does not provide specific criteria regarding how to identify separate Unrelated Trades or Businesses. Consequently, the IRS recently released interim guidance and transition rules related to the new method of calculation Unrelated Business Taxable Income (UBTI).

IRS Notice 2018-67 indicates that until regulations are issued, organizations can rely on reasonable, good-faith interpretations of the rules in making such a determination. It is recommended that organizations utilize the six-digit codes per the North American Industry Classification System (NAICS) to assist in identifying each trade or business. The NAICS is an industry classification system used to collect, analyze and publish statistical business data. For example, under the NAICS code, all income from advertising and related services could be considered one Unrelated Trade or Business, regardless of the source of the advertising income.

These new requirements for reporting Unrelated Business Income could have a significant impact on the tax liability reported on your tax year 2018 IRS Form 990-T Exempt Organization Business Income Tax Return.

Contact a Whittlesey Advisor for more information.