IRS proposed revised rules for accounting for unrelated business income

• Published date: 01 July 2020
• Date: 01 July 2020
• DOI: http://doi.org/10.1002/nba.30797

JULY 2020 NONPROFIT BUSINESS ADVISOR

5

© 2020 Wiley Periodicals LLC • All rights reserved

DOI: 10.1002/nba

Industry News

IRS proposed revised rules for accounting

for unrelated business income

The Internal Revenue Service has proposed revised

guidelines for nonprots that aim to make it easier

to account for unrelated business taxable income

(UBTI) derived from their operations.

The proposal provides guidance for complying

with requirements under the Tax Cuts and Jobs Act

of 2017 for tax-exempt organizations with more than

one unrelated trade or business, explaining how they

must account for income and expenses for each item-

ized trade or business category.

As originally written in the TCJA, tax-exempt

organizations subject to the UBTI tax must compute

their unrelated business income tax, including any de-

ductions for net operating losses, separately for each

trade or business, which the IRS refers to as a silo.

As well, under prior law, UBTI was the gross

income of all unrelated trades or businesses less the

allowed deductions from all unrelated trades or busi-

nesses. But starting in tax-year 2018, when the TCJA

took effect, the loss from one trade or business cannot

be used to offset the income from another separate

trade or business.

The problem with the original TCJA legislation,

however, is the number of different trade or business

categories applied to nonprot operations, according

to David L. Thompson, vice president for public

policy at the National Council of Nonprots, which

opposed the rules from the start.

According to Thompson, the theory behind the

provisions in the TCJA was that it would “level the

playing eld” by making nonprots follow the same

UBTI rules as for-prots. Businesses in some circles

had voiced concerns that a nonprot could, for exam-

ple, sell a soda or bag of chips at a concession stand

or souvenir shop for less than cost and then write off

the loss against prots made via a different program

or service—essentially allowing them to underprice

for-prot competitors also selling sodas or chips.

“It was supposed to balance out so that nonprots

didn’t have an advantage vis-à-vis for-prots,” he said.

However, when looking at the universe of activities

that nonprots engage in, it quickly became apparent

that the law would cause major headaches for char-

ities to comply with.

“There’s just too many trade or business catego-

ries,” Thompson said.

A single nonprot can have hundreds or even thou-

sands of different categories, and the classication

system used to identify each category is so ambiguous

that it’s often difcult to determine which category

should be used for certain activities—leading to even

more compliance burden.

The end result is a major “complexication” of

the system used to account for revenue and expenses

across a charity’s operations, Thompson asserts.

Under the newly proposed guidelines, the number

of categories—or silos—into which nonprots must

separate out their revenue streams is considerably

lower, at about 20 or so.

“It’s still awful, but it is an improvement,” Thom-

son said.

Thomson said what really needs to happen is the

full repeal of the provisions in the TCJA, which is

what his organization will continue to advocate.

“The law went too far the other way and now dis-

advantages nonprots instead of for-prots,” he said.

“Congress moved too quickly when they drafted it,

and provided no opportunity for input or pushback

from the nonprot sector,” he added.

In the end, he said, the law just created a lot of

busywork and no real benets to anyone: nonprot,

for-prot or otherwise.

To read the IRS proposal in full, visit https://bit.

ly/3gxW7Pw. ■

For more information

David L. Thompson is vice president for public policy at

the National Council of Nonprots, which works to keep

nonprots informed and empowered to create a positive

public policy environment that best supports them in

advancing their missions. With 25,000-plus organizational

members, the council identies emerging trends, shares

proven practices and promotes solutions that benet

charitable nonprots and the communities they serve. For

more information, Thompson can be reached via email

at dthompson@councilofnonprots.org or visit https://

www.councilofnonprots.org.