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On August 21, the Internal Revenue Service released IRS Notice 2018-67, which provides long-awaited interim guidance on the new rules under Section 512(a)(6) of the Internal Revenue Code. This IRC section, added by the Tax Cuts and Jobs Act, requires an exempt organization with more than one unrelated trade or business to separately calculate unrelated business taxable income (UBTI) with respect to each trade or business.
Until proposed regulations are released later this year, exempt organizations can rely on this interim guidance. Following are some observations on what’s provided in the IRS Notice.
Multiple Unrelated Trade or Business Activities
There is no statutory or regulatory definition as to what constitutes a trade or business for UBTI purposes. Pending issuance of proposed regulations, exempt organizations may rely on reasonable, good-faith interpretations of the IRC, including all facts and circumstances, when determining whether it has more than one trade or business. Use of the NAICS 6-digit codes will be considered a practical interpretation until proposed regulations are published.
Investments in Partnerships with UBTI
Exempt organizations other than social clubs (IRC Section501(c)(7)) may aggregate UBTI from an interest in a single partnership with multiple trades or businesses conducted by lower-tier partnerships, as long as the directly held interest in the partnerships meets the requirements of either the de minimis test or the control test. Additionally, under the interim rule, an exempt organization may aggregate all qualifying partnerships interests and treat the group of qualifying partnership interests as comprising a single trade or business for purposes of IRC 512(a)(6)(A). The income from qualifying partnership interests that may be aggregated includes debt-financed income.
In general, the de minimis test is met if the exempt organization directly holds no more than 2% of the profits interest and no more than 2% of the capital interest. Generally the control test is met if the organization’s partnership interest is no more than 20% of the capital interest and the organization does not have control or influence over the partnership. Special rules apply for both tests that require combining related interests in certain circumstances. When determining the percentage interests, an exempt organization may rely on the Schedule K-1 from the partnership.
A transition rule may be applied for a partnership interest acquired before August 21, 2018 if the partnership interest cannot satisfy either the de minimis test or control test. That is, the exempt organization may treat each partnership interest as a single trade or business regardless of whether or not there is more than one trade or business directly conducted by the partnership or lower-tier partnerships.
Other Guidance
Other interim guidance in Notice 2018-67 includes the following:
The IRS is soliciting comments on the proposed regulations. Submissions should be offered on or before December 3, 2018.
Although the proposed guidance is welcome, questions still remain. If you have any questions or would like to discuss these regulations in further detail, please contact your Schneider Downs representative.
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