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IRS Proposes Rules to Help Nonprofits Calculate Their Taxes (1)

April 23, 2020, 12:46 PMUpdated: April 23, 2020, 1:14 PM

The IRS provided more clarity on how nonprofits should calculate taxes owed on income they earn from activities that diverge from their core mission.

The agency in proposed regulations (REG-106864-18) released Thursday cleared up details on a provision in the 2017 tax law that requires nonprofits to calculate unrelated business income tax (UBIT) separately for each trade or business.

The rules establish the method to determine whether an organization has more than one unrelated trade or business under tax code Section 512(a)(6) and to identify separate unrelated trades or businesses for purposes of calculating unrelated business income.

UBIT applies to any activities a nonprofit engages in that aren’t related to the tax-exempt purpose of the organization.

The rules package underwent two rounds of review at the Office of Information and Regulatory Affairs, after Congress passed a stimulus law (Public Law 116-136) that allowed for the carryback of net operating losses. The IRS will further consider how the change affects UBIT, and may issue additional rules.

In line with Notice 2018-67, the IRS said, using the six-digit classification regime North American Industry Classification System, or NAICS, is “administrable for exempt organizations and the IRS.”

The proposed rules say an organization should identify its separate unrelated trades or businesses using the first two digits of the NAICS codes (NAICS 2-digit codes).

—With assistance from Colleen Murphy.

(Updates with additional information throughout.)

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Meg Shreve at mshreve@bloombergtax.com

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