29 October 2018 IRS releases draft instructions for 2018 Form 990-T with updates for TCJA changes The IRS has published draft instructions for the 2018 Form 990-T, Exempt Organization Business Income Tax Return, reflecting certain changes enacted by the 2017 Tax Cuts and Jobs Act (TCJA). The IRS released the draft of the Form 990-T for 2018 earlier this month — see Tax Alert 2018-2082. For a discussion of the TCJA changes affecting exempt organizations, see Tax Alert 2017-2142. The general instructions include new guidance specifying which parts of Form 990-T must be completed for certain filers:
The general instructions also list a number of additional forms that may be required for some filers:
In addition, the instructions no longer list Form 8903, Domestic Production Activities Deduction, (filed to deduct a portion of income from certain qualified domestic production activities) as an additional form that may need to be filed. Form 990-T filers have used Block H (on Form 990-T, page 1) in previous years to describe an organization's primary unrelated business activity. The draft 2018 Form 990-T instructions now request an organization to enter in Block H the total number of the organization's unrelated trades or businesses. If an organization only has one unrelated trade or business, it should describe that business in Block H — and then complete Parts I, II and III. If an organization has more than one unrelated trade or business, it should describe one such business in Block H -then complete Parts I and II for that trade or business, complete Schedule M for each additional trade or business, then complete Part III. Line 5. Income or loss from a partnership or an S corporation — The instructions state that filers should refer to IRS guidance when reporting their distributive share of partnership income (and partnership deductions directly connected with such income) from trades or businesses of a partnership that are unrelated trades or businesses with respect to the filers. Furthermore, they instruct filers to refer to IRS guidance for rules permitting the aggregation of income (and directly connected deductions) of certain partnership interests. Line 7. Unrelated debt-financed income — The instructions state that filers should refer to IRS guidance when reporting income from one or more debt-financed properties and also for rules permitting the aggregation of unrelated debt-financed income with other UBTI in certain circumstances. (For a discussion of Notice 2018-67 regarding aggregation of partnerships and unrelated debt-financed income, see Tax Alert 2018-1700.) Line 12. Other income — The instructions stipulate that a noncorporate taxpayer (for example, a pension trust) with a loss attributable to its trade or business should see Form 461, Limitation on Business Losses, and instructions for details on the amount of excess business loss limitation. Filers should enter the amount of the excess business loss from Form 461 on Line 12 of Form 990-T. The instructions add that filers that have a Section 965(a) inclusion for the tax year should enter the net amount (the Section 965(a) inclusion less the corresponding Section 965(c) deduction) on line 12 (in addition to completing and attaching Form 965 and Form 965-B). The instructions specify that only expenses directly connected with an unrelated trade or business reported in Part I of Form 990-T or Schedule M (as applicable) may be deducted on these lines. Regarding travel, meals and entertainment, the instructions expressly state that entertainment expenses, membership dues, and facilities used in connection with these activities generally cannot be deducted, to account for the modifications under TCJA to Section 274. They further specify that deductions for entertainment-related meal expenses are generally disallowed. Line 17. Bad debts — The instructions state that filers should enter in line 17 (bad debts) the total receivables from an unrelated trade or business that were previously included in taxable income and that became worthless in whole or in part during the tax year. Line 18. Interest — The instructions on interest include new guidance with respect to the limitation on the deduction. They state that business interest expense is limited to the sum of business interest income, 30% of the adjusted taxable income, and floor plan financing interest. In general, a taxpayer is not required to limit business interest expense under Section 163(j) if the taxpayer meets the gross receipts test (i.e., has average annual gross income receipts of $25 million or less for the three prior tax years). If the taxpayer does not meet the gross receipts test, it generally must file Form 8990, Limitation on Business Interest Expense. Line 20. Charitable contributions — The instructions clarify that an organization with more than one unrelated trade or business may allocate the deduction among those trades or businesses using any reasonable method, rather than taking the deduction against net UBTI for the year. Line 31. Net operating loss (NOL) deduction arising in tax years beginning on after January 1, 2018 (post-2017 NOLs).The instructions explain that the TCJA eliminated the option for most taxpayers to carry-back post-2017 NOLs, though post-2017 NOLs can be carried forward indefinitely. The instructions add basic guidance on entering the amounts in lines 33 (total of UBTI from all unrelated trades or businesses) and 34 (amounts paid for disallowed fringes). The instructions also state to enter as a deduction the amount of n NOLs arising in tax years beginning before January 1, 2018 (pre-2018 NOLs) on new line 35, but not to enter more than the net UBTI reported on lines 33 and 34. Line 37. Specific deduction — The instructions explain that a specific deduction of $1,000 is allowed except for computing the NOL and the NOL deduction under Section 172. The instructions add that, in general, only one specific deduction may be taken, regardless of the number of unrelated businesses conducted. However, special rules apply for a diocese, province of a religious order, or convention or association of churches. The new computation of tax is reflected in the line 39 instructions (i.e., UBTI multiplied by 21%). The line 40 instructions include a tax rate table for trusts. The alternative minimum tax (for trusts only) is addressed in the line 42 instructions. The instructions for line 45b (other credits) caution the filer to not enter any bond credits for bonds issued after 2017. The instructions also add a note to enter the allowable credits from Form 8912, Credit to Holders of Tax Credit Bonds, line 12, from prior years allowed for the current tax year. Line 47. Other taxes — The instructions state to use line 47 to report the base erosion minimum tax under Section 59A. The instructions refer filers to the Form 8991 instructions to determine if the organization needs to compute base erosion minimum tax and enter it on Line 47. Line 49. Section 965 tax liability — The instructions state the current year Section 965 installment payment should be entered here. Filers electing to pay the Section 965 net tax liability in installments should also complete and attach Form 965-B. The instructions explain that organizations with more than one unrelated trade or business should complete Part I and Part II of Form 990-T for the trade or business described in Block H, and should complete and attach a separate Schedule M for each additional unrelated trade or business. In addition, the instructions ask filers to report the total UBTI from line 32 of Form 990-T and each Schedule M on Part III, line 33. If line 32 of any Schedule M is less than zero, that amount is not to be included on the amount reported on Part III, Line 33. Only the lines that are relevant to the unrelated trade or business reported on a Schedule M need to be completed on that Schedule M. (The IRS has not yet released a draft of Schedule M.) The changes to the 2018 draft Form 990-T Instructions reflect the IRS's ongoing effort to fully implement the provisions of the TCJA that directly affect exempt organizations. The enactment of Section 512(a)(7) will require many organizations that previously did not have UBTI to file Form 990-T. Organizations that report UBTI attributable only to qualified transportation fringe benefit expenses are specifically instructed to complete limited portions of the Form 990-T. Similarly, organizations that are filing solely due to the proxy tax on lobbying and political expenditures are also directed to complete limited portions of the Form 990-T. The instructions reference Form 965, which will be used to report a Section 965(a) inclusion, a one-time transition tax for US shareholders owning a controlled foreign corporation (CFC) and certain other foreign corporations with a 10% domestic corporate shareholder, referred to as specified foreign corporations (SFC). (See Tax Alert 2018-1571, for a detailed discussion of the proposed Section 965 regulations.). Generally, Section 965 income is only includible in income by exempt organizations if the income is classified as unrelated business income. In addition, private foundations must include the amount computed under Section 965(a) in the calculation of gross investment income for purposes of determining the excise tax imposed under Section 4940. The Section 965 tax liability can be paid in installments, as reported on Form 965-B, which the Form 990-T draft instructions state should be attached to Form 990-T. As of publication date, the Form 965-B draft instructions have not been released; however, these forthcoming instructions should assist the taxpayer in determining the proper installment payment schedule. Although it has yet to be released, it is likely that Schedule M will be similar to Parts I and II of the 2018 draft Form 990-T because the instructions state that if the organization is "filing one or more Schedules M, refer to the instructions for Parts I and II in completing the corresponding lines on Schedule M." The UBTI amounts for each separate trade or business will then be totaled on line 33. The instructions report that if an exempt organization has more than one unrelated trade or business, it may allocate charitable contributions using any allocation method, so long as it is reasonable. Thus, organizations will be able to maximize their charitable contribution deduction by allocating the aggregate amount to any trade or business that is reporting UBTI rather than restricting the deduction to charitable contributions made solely in connection with a particular trade or business. The 2018 draft Form 990-T Instructions provide that pre-2018 NOLs can be used to offset post-2017 tax year net UBTI, of all unrelated trades or businesses in the aggregate, only after post-2017 NOLs from a given unrelated trade or business have been deducted from the UBTI of that trade or business. This also suggests that that the IRS does not want filers with more than one unrelated trade or business for a tax year to take the "first in, first out" approach of deducting pre-2018 NOLs from the UBTI of a particular trade or business for that tax year. The instructions also provide that post-2017 NOLs for a particular unrelated trade or business will be reported only in connection with that trade or business; specifically, on Part II, line 31 of Form 990-T for the organization's first unrelated trade or business and on an equivalent line of Schedule M for any additional trades or businesses. Document ID: 2018-2162 |
