The IRS recently posted a frequently asked questions (FAQ) guide for tax-exempt organizations that explains how recent coronavirus-related legislation impacting net operating losses (NOLs) interacts with Section 512(a)(6) of the Internal Revenue Code.
Section 512(a)(6), added to the IRC by the 2017 Tax Cuts and Jobs Act (TCJA), requires exempt organizations to calculate unrelated business taxable income (UBTI), and related NOLs, separately for each unrelated trade or business the taxpayer engages in (aka “siloing”). Prior to the enactment of Section 512(a)(6), which impacted taxable years beginning after Dec. 31, 2017, similarly-situated taxpayers calculated UBTI by aggregating the income and deductions from all unrelated trades or businesses and arriving at a single income/loss number for the year. The intended impact of Section 512(a)(6) was originally limited to future years because Congress, in the same legislation, also effectively repealed NOL carrybacks.
More than two years later, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which, among other actions, provided that any NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021 (CARES Act NOLs), may be carried back to the five taxable years preceding the year of loss.
The FAQ provides exempt organizations with guidance on the novel scenarios created by the interaction of the CARES Act and Section 512(a)(6). Read on for the three questions and answers as written and our thoughts on their guidance.
“Q1. In determining the UBTI of an exempt organization with more than one unrelated trade or business in a taxable year beginning after December 31, 2017, are CARES Act NOLs required to be siloed so that each unrelated trade or business calculates its NOL separately?
A1. Yes. In determining the UBTI in taxable years beginning after December 31, 2017, section 512(a)(6) requires an exempt organization with more than one unrelated trade or business to silo NOLs arising in taxable years beginning after December 31, 2017, so that each trade or business calculates its NOL separately. CARES Act NOLs arise in taxable years beginning after December 31, 2017, and therefore must be siloed.
Q2. Can an exempt organization subject to section 512(a)(6), and that has CARES Act NOLs, carry back and deduct those NOLs against the aggregate UBTI in a taxable year beginning before January 1, 2018?
A2. Yes. An exempt organization subject to section 512(a)(6) can deduct CARES Act NOLs against the aggregate UBTI in a taxable year beginning before January 1, 2018, when carrying the NOL back to such taxable year because section 512(a)(6) does not apply to such taxable year. Also, an exempt organization may carry back CARES Act NOLs attributable to an unrelated trade or business, even if the exempt organization would not have had a CARES Act NOL if the deduction in the relevant taxable year were calculated on an aggregate basis.
Q3. Can an exempt organization deduct CARES Act NOLs against aggregate UBTI in taxable years beginning after December 31, 2017, if any CARES Act NOLs remain after being carried back to taxable years beginning before January 1, 2018?
A3. No. The special rule in section 13702(b)(2) of the TCJA that allows NOLs arising in taxable years beginning before January 1, 2018, to be deducted against aggregate UBTI does not apply to CARES Act NOLs because those NOLs arise in taxable years beginning after December 31, 2017. Accordingly, when deducting CARES Act NOLs against UBTI in taxable years beginning after December 31, 2017, the CARES Act NOLs must be siloed consistent with section 512(a)(6).”
What does CohnReznick think?Enactment of the CARES Act provides exempt organizations with the opportunity to reassess pre- and post-2018 UBTI NOLs usage. The IRS’s FAQ is a helpful starting point in this analysis. Careful analysis must be made as to the separation of revenue streams to properly distribute CARES Act NOLs. Organizations with income in earlier years prior to generating an NOL may find these clarification rules beneficial and may now elect to file a carryback refund claim.
Subject matter expertise
CPA, MST, Partner & Exempt Organizations Tax Services Leader
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.