The IRS has published a draft 2018 Form 990-T, Exempt Organization Business Income Tax Return, reflecting certain changes enacted by the 2017 Tax Cuts and Jobs Act (TCJA).

Background

The TCJA made a number of important changes affecting exempt organizations that, in general, are effective for the 2018 tax year. For a detailed discussion, see Tax Alert 2017-2142. Some of these changes specifically affect organizations' determination of unrelated business taxable income (UBTI):

1. New Section 512(a)(6) requires organizations operating one or more unrelated trades or businesses to compute UBTI separately for each trade or business (without regard to the specific deduction under Section 512(b)(12)).
2. New Section 512(a)(7) treats as UBTI funds used to pay qualified transportation and qualified parking fringe benefits, and any on-premises athletic facilities, provided the amounts are not deductible under Section 274.

In addition, the TCJA made significant changes to international tax rules. For a detailed discussion, see Tax Alert 2017-2166. Among these changes, and relevant for some exempt organizations, new Section 965 imposes a one-time transition tax on a 10% US shareholder's pro rata share of a foreign corporation's accumulated post-1986 deferred foreign income.

Changes in draft 2018 Form 990-T

In prior years, block H of Form 990-T required the filing organization to describe its primary unrelated business activity. The draft 2018 Form 990-T requires the organization to list the number of the organization's trades or businesses, and describe the first (or only) trade or business within Block H. If the organization has more than one trade or business, then the organization will be required to complete a Schedule M for each unrelated trade or business before completing the new Part III (Total Unrelated Trade or Business) and the subsequent Parts IV (Tax Computation) and V (Tax Payments). The IRS has not yet released a draft of the new Schedule M.

Part II (Deductions Not Taken Elsewhere) of the draft 2018 Form 990-T — like the 2017 Form 990-T — includes a box in line 30 to enter a subtotal for "Unrelated business taxable income before net operating loss deduction." However, while the 2017 form subsequently asks in line 31 for the net operating loss deduction, the draft 2018 Form 990-T in line 31 asks for the "Deduction for net operating loss arising in tax years beginning on or after January 1, 2018" (emphasis added) and refers filers to the 2018 Form 990-T instructions. The IRS has not yet released the 2018 Form 990-T instructions in draft form.

The draft 2018 Form 990-T then breaks out the computation of total UBTI in a new Part III. Part III adds a new line 33 for total UBTI computed from all unrelated trades or businesses and a new line 34 for amounts paid for disallowed fringes. It also adds a new line 35 for "Deduction for net operating loss arising in tax years beginning before January 1, 2018" (emphasis added) and again refers filers to the instructions.

Following the computation of UBTI in line 38, the draft 2018 Form 990-T Part IV (Tax Computation) includes a new line 39 for "Organizations Taxable as Corporations." To compute the tax, line 39 instructs these filers to multiply the total in line 38 by 21%.

In Part V (Tax and Payments), the draft 2018 Form 990-T includes a new line 49 for Section 965 tax liability. Line 49 asks filers to enter the 2018 net 965 tax liability paid from Form 965-B, Part II, column (k), line 2.

Implications

The newly released draft 2018 Form 990-T has been modified to conform with revisions to the tax code under the TCJA and provides a snapshot of what information will be requested from tax-exempt organizations under the new law. However, until the draft 2018 Form 990-T instructions are available, it is not clear exactly how Form 990-T filers should calculate UBTI if they have multiple unrelated trades or businesses.

Consistent with the Section 512(a)(6) requirement that organizations operating one or more unrelated trades or businesses separately compute UBTI, Schedule M will likely include a separate income and deduction calculation for each additional unrelated trade or business, similar to Form 990-T Part I (Unrelated Trade or Business Income) and Part II (Deductions Not Taken Elsewhere). UBTI for each separate trade or business will then be totaled on line 33. Basically, Parts I and II of Form 990-T, and the combination of one or more Schedule(s) M, will be the total UBTI of the organization. However, Schedule M has not been released, and line 33 provides little detail, only referencing the yet-to-be-released instructions.

Among the changes to the 2017 Form 990-T are separate lines for calculating any net operating loss (NOL) arising in tax years beginning both before and after January 1, 2018. NOLs arising in tax years beginning on or after January 1, 2018, are deducted in Part II (deductions not taken elsewhere) and presumably in Schedule M for each additional separate unrelated trade or business. This is consistent with the TCJA requirement that NOLs be tracked separately for each unrelated trade or business and used to offset only income from that same trade or business. Exempt organizations using these lines may be required to attach a statement showing the separate computation of the NOL deduction(s), including an additional calculation for any remaining NOL established in prior tax years.

Once those separate UBTI amounts are totaled, a Form 990-T filer will need to add amounts paid for disallowed fringe benefits pursuant to Section 512(a)(7) (line 34), deduct any NOL incurred prior to January 1, 2018, apply any available specific deduction, then list net UBTI for the organization on line 38 (previously line 34). This suggests that organizations should apply any NOL generated prior to January 1, 2018, against the organization's overall UBTI liability, after separate UBTI on each separate unrelated trade or business is calculated, and after qualified fringe benefit UBTI is calculated. However, unless the instructions offer a different explanation, it does not appear that any NOL generated after January 1, 2018, from an unrelated trade or business can be utilized to offset any liability for disallowed fringe benefits under Section 512(a)(7).

Also notable is the new section for an entity's Section 965 tax liability, which requires an additional form and statement to be filed with the IRS detailing the Section 965 income, deductions, and tax reported for the one-time transition tax. Lastly, the draft 2018 Form 990-T reflects the new, lower 21% corporate tax rate on UBTI for tax-exempt corporations.

The draft 2018 Form 990-T does not include reporting of the new Section 4960 compensation excise tax or the Section 4968 net investment income tax, which are to be paid via Form 4720 (Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code). For a discussion of the draft Form 4720, see Tax Alert 2018-1669.

Overall, the revisions to the draft 2018 Form 990-T reflect the greater compliance and administrative burden imposed by Sections 512(a)(6) and 512(a)(7) on exempt organizations that engage in multiple unrelated trades or businesses. Organizations are encouraged to submit comments regarding the revised form.

Please contact your Ernst & Young LLP tax professional with any questions.

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