EY has prepared an annotated version of the Form 990-T (Exempt Organization Business Income Tax Return), Schedule A, and instructions. The annotated form and instructions show the changes that the IRS has made for tax year 2020. These documents (which are attached below) highlight and explain changes from tax year 2019.

Changes to the 2020 federal Form 990-T, schedules and instructions

The 2020 Form 990-T has been redesigned and includes some significant changes from the 2019 version, including:

1. The 2020 Form 990-T must be filed electronically. The IRS is in the process of approving electronic filing service providers whose software meets its requirements.
2. The IRS has moved most of the information on the 2019 Form 990-T and Schedule M to the new Schedule A. Now, the 2020 core Form 990-T aggregates information from each Schedule A (completed separately for each unrelated trade or business) to calculate tax liability.
3. Unrelated business activity codes are no longer reported on the core Form 990-T, Box E. Rather, Box E now requires reporting of the group exemption number, if any (previously Box F). Business activity codes under the North American Industry Classification System (NAICS) are reported on Schedule A.
4. Form 990-T, Part I includes a new line for trusts to report IRC Section 199A deductions.
5. Form 990-T, Part III added an option to indicate if the total tax computed includes tax previously deferred under IRC Section 1294, election to extend time for payment of tax on undistributed earnings of a private foreign investment company.
6. Organizations that are reporting a change in accounting method will need to either:
1. Detail the change on Form 990, Form 990-EZ, Form 990-PF or Form 1128
2. Provide an explanation on Part V of Form 990-T
7. The 2020 Form 990-T, Schedule A is substantially similar to the 2019 Schedule M (Form 990-T). Both require the tax-exempt organization to prepare a separate schedule for each of its unrelated trades or businesses, report its unrelated business income from each unrelated business in Part I, and report in Part II any deductions related to that unrelated business not taken elsewhere. The 2020 Schedule A (Form 990-T) expands on the 2019 Schedule M by adding Parts III through X (previously Schedules A through J on the 2019 Form 990-T) and a new Part XI for supplemental narrative reporting.
8. Schedule A requires unrelated business activities to be classified using the appropriate 2-digit NAICS code, followed by four zeros (because the IRS has not yet updated its programming to accept reporting of 2-digit rather than 6-digit NAICS codes). Under IRC Section 512(a)(6), an exempt organization may not aggregate income and deductions from all unrelated trades or businesses when calculating unrelated business taxable income (UBTI). Rather, an exempt organization should calculate and report UBTI separately for each of its unrelated trades or businesses. The exempt organization should separate, or "silo," each of its unrelated trades or businesses based on the 2-digit NAICS code that best describes that business (except for qualifying partnership interests, qualifying S corporation interests, and debt-financed property whose income is aggregated in a separate silo without a NAICS code), and report that code on Line C, followed by four zeros.
9. Schedule A includes a new Box D for listing the sequence number (e.g., 2 of 5) of that Schedule A, if multiple Schedules A are filed to report UBTI from multiple unrelated trades or businesses.
10. Schedule A, Part II, Line 17 refers to deductions for net operating losses (NOLs) arising in tax years beginning on or after January 1, 2018. These losses must be applied to the specific unrelated trade or business that generated them, so that they offset losses only of that unrelated trade or business.
11. Tax-exempt organizations that report information on Schedule A, Part IV, Rent Income, and Part V, Unrelated Debt-Financed Income, must now report each property's street address, city, state, zip code, and whether the property is dual-use, in addition to providing a property description.
12. Schedule A, Part XI is a new supplemental information section that can be used to explain the organization's operations, provide narrative responses to certain questions, or supplement information reported on Schedule A. All supplemental narratives for Schedule A must be included in Part XI, rather than in separate attachments, due to mandatory Form 990-T e-filing.

Implications

The 2020 Form 990-T has been substantially redesigned. Although the redesign primarily reorganizes, rather than expands, information on the 2019 Form 990-T, the redesign does include some significant changes from the 2019 version. Most of the information in the core form and Schedule M has been moved to the new Schedule A, which is completed for a single unrelated trade or business. The core Form 990-T aggregates information from each Schedule A to calculate tax liability.

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 a separate Schedule A (Form 990-T) for each unrelated trade or business, as defined by 2-digit NAICS codes. Schedule A, like the 2019 Schedule M, reflects the UBTI siloing requirements of IRC Section 512(a)(6). However, the 2020 Form 990-T and instructions are not entirely consistent with the IRC Section 512(a)(6) final regulations. For instance, the form is still structured so that filers apply post-2017 NOLs from an unrelated trade or business to offset any gain from that trade or business (in Schedule A, Part II, Line 17), then apply pre-2018 NOLs to offset aggregate UBTI from all of the filer's unrelated trades or businesses (in Part I, Line 6), contrary to the first-in, first-out NOL application approach of the final regulations. Given that the final regulations become effective for tax years beginning on or after December 2, 2020, it is likely the IRS will further revise Form 990-T, Schedule A and instructions to more closely reflect the IRC Section 512(a)(6) final regulations for tax year 2021.

The instructions describe the provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act that allows organizations to carry back NOLs arising in their 2018—2020 tax years to each of the five tax years preceding the year in which the NOL was generated. Accordingly, tax-exempt organizations should review the revised CARES Act NOL rules and determine whether to carry back 2018—2020 tax year NOLs or waive the carryback period for those NOLs. (See Tax Alert 2020-0807.)

Because the CARES Act did not change the 10% charitable contribution deduction limitation of IRC Section 512(b)(10), the Instructions for Form 990-T, Part I, Line 4 (formerly Part III, Line 34) and Appendix B (new appendix for Charitable Contribution Deduction instructions previously found in Part III, Line 34 instructions) were not amended to reflect Section 2205 of the CARES Act applicable to corporations (which allows charitable deductions totaling up to 25% of a corporation's 2020 taxable income). Although Appendix B does not directly address whether organizations formed as tax-exempt trusts may apply the increased cash contribution deduction limit of 100%, up from 50%, it does state that trusts making qualified cash contributions in 2020 or 2021 may be eligible to deduct these contributions without regard to the normal taxable income limits for trusts, under Section 2205 of the CARES Act. As a result, organizations claiming charitable contribution deductions should pay close attention to the applicable limits and the possible effect of the CARES Act on those limits.

The Taxpayer First Act, enacted July 1, 2019, requires tax-exempt organizations to electronically file information returns and related forms. (See Tax Alert 2019-1255.) Mandatory electronic filing began in February 2021. Tax-exempt organizations should evaluate what electronic filing tools and options are available, to ensure compliance with the mandate.

Please contact your Ernst & Young LLP professional for further information.

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— For more information about EY's Exempt Organization Tax Services group, visit us here.

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ATTACHMENTS

2020 Form 990T_Annotated

2020 990-T Instructions Annotated