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The IRS has released two new draft forms to be used by tax-exempt organizations that must report unrelated business income — the 2020 Form 990-T and Schedule A (Form 990-T). The new Schedule A (Form 990-T) replaces the 2019 Schedule M (Form 990-T) and reflects changes made in the proposed regulations under IRC Section 512(a)(6), issued in April 2020 (REG-106864-18; see Tax Alert 2020-1220). The IRS invites interested parties to submit comments on the draft forms.

Underlying proposed regulations

IRC Section 512(a)(6), enacted under the Tax Cuts and Jobs Act, requires tax-exempt organizations operating more than one unrelated trade or business to compute unrelated business taxable income (UBTI) separately for each trade or business (without regard to the $1,000 specific deduction under IRC Section 512(b)(12)). The organization's UBTI for a tax year is the sum of the amounts (not less than zero) computed for each separate trade or business (less the IRC Section 512(b)(12) specific deduction).

The April 2020 proposed regulations provided guidance for tax-exempt organizations on how to calculate UBTI on separate unrelated trades or businesses. The proposed regulations would generally require a tax-exempt organization to:

• Identify its separate unrelated trades or businesses using the first two digits of the North American Industry Classification System (NAICS) codes
• Report each NAICS 2-digit code on its Form 990-T only once, so that the UBTI of similar unrelated trade or business activities identified using a particular 2-digit code is reported in the aggregate under that code
• Use the same NAICS 2-digit code it has chosen for a particular trade or business, beginning with the codes reported on the first Form 990-T filed after the regulations are published as final in the Federal Register

Draft Form 990-T

The 2020 draft Form 990-T is considerably shorter (two pages) than its 2019 predecessor (five pages). The draft 2020 Form includes no schedules, whereas the 2019 Form 990-T also included:

• Schedule A — Cost of Goods Sold
• Schedule C — Rent Income (From Real Property and Personal Property Leased with Real Property)
• Schedule E — Unrelated Debt-Financed Income
• Schedule F — Interest, Annuities, Royalties, and Rents from Controlled Organizations
• Schedule G — Investment Income of a Section 501(c)(7), (9), or (17) Organization
• Schedule I — Exploited Exempt Activity Income, Other Than Advertising Income
• Schedule J — Advertising Income
• Schedule K — Compensation of Officers, Directors, and Trustees

The majority of these schedules were relabeled as Parts III through IX and moved to the new draft Schedule A. In addition to the schedules, the 2019 Form 990-T contained the following sections:

• Part I, Unrelated Trade or Business Income
• Part II, Deductions Not Taken Elsewhere
• Part III, Total Unrelated Business Taxable Income
• Part IV, Tax Computation
• Part V, Tax and Payments
• Part VI, Statements Regarding Certain Activities and Other Information

In contrast, the draft 2020 Form 990-T contains:

• Part I, Total Unrelated Business Taxable Income
• Part II, Tax Computation
• Part III, Tax and Payments
• Part IV, Statements Regarding Certain Activities and Other Information
• Part V, Supplemental Information

The draft 2020 Form 990-T includes a separate line for trusts to report any Section 199A deductions (Part I, Line 9), as well as a question on changes in the organization's method of accounting (Part IV, Line 4a). Tax-exempt organizations that are reporting a change in their method of accounting will also need to (1) describe the change on Form 990, Form 990-EZ, Form 990-PF or Form 1128, or (2) provide an explanation on Part V of the Form 990-T.

Draft Schedule A (Form 990-T)

Page one of the draft Schedule A (Form 990-T) is substantially similar to that of the 2019 Schedule M (Form 990-T). Both require the tax-exempt organization to list its unrelated trade or business income in Part I and any deductions not taken elsewhere in Part II. The new draft Schedule A (Form 990-T) expands on the 2019 Schedule M by adding Parts III through XI (previously known as Schedules A through J on the 2019 Form 990-T), as follows:

• Part III, Costs of Goods Sold
• Part IV, Rent Income (From Rental Property and Personal Property Leased with Real Property)
• Part V, Unrelated Debt-Financed Income
• Part VI, Interest, Annuities, Royalties, and Rents from Controlled Organizations
• Part VII, Investment Income of a Section 501(c)(7), (9), or (17) Organization
• Part VIII, Exploited Exempt Activity Income, Other Than Advertising Income
• Part IX, Advertising Income
• Part X, Compensation of Officers, Directors, and Trustees
• Part XI, Supplemental Information

In addition to some formatting changes, Parts IV and V have added the property street address, city, state and zip code to the description of the property as well as a box to indicate whether the property is dual-use. Furthermore, Part VIII is limited to reporting one exploited exempt activity, rather than listing up to four on the 2019 Form 990-T. Finally, Part IX has been condensed from the 2019 Form 990-T by adding check boxes to indicate whether the tax-exempt organization is reporting two or more periodicals on a consolidated basis.

Implications

The draft 2020 Form 990-T presents some significant changes from the 2019 version. The majority of the information and calculations have been moved to the new Schedule A, with the Form 990-T itself serving mostly as a summation in order to calculate tax liability. The new Schedule A (Form 990-T), though similar to the 2019 Schedule M, incorporates each change presented by the IRC Section 512(a)(6) proposed regulations.

Previously, tax-exempt organizations with only one unrelated trade or business were not required to complete and file Schedule M. Now, the vast majority of tax-exempt organizations will have to complete and file Schedule A (Form 990-T) in addition to the Form 990-T itself (tax-exempt organizations that are filing Form 990-T solely to report tax on noncompliant facility income would not be required to complete Schedule A (Form 990-T)).

In addition to an explanation of any change in accounting method, the IRS may require the disclosure of other computational information in Part V of Form 990-T and Part XI of Schedule A (Form 990-T) (Supplemental Information). Alternatively, the addition of a Supplemental Information section to both Form 990-T and Schedule A may enable the taxpayer to provide any other additional information that it wishes to share with the IRS and/or the public regarding its computation of taxable income. Tax-exempt organizations should carefully consider whether they wish to explain their tax calculations for public consumption.

Once finalized, software vendors will need some time to reprogram and format these changes into their products before releasing anything to the public. Organizations should also bear in mind that the 2020 Form 990-T will have a mandatory electronic-filing requirement, thereby increasing the necessity for accurate tax compliance software. For further information, please contact your Exempt Organizations professional.

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