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EY has prepared an annotated version of Form 990-T (Exempt Organization Business Income Tax Return), Schedule A, and their instructions. The annotated form and instructions show what changes the IRS has made for tax year 2021. These documents (attached to this Alert) highlight and explain changes from tax year 2020. Due to the limited changes to Form 4720 and instructions from 2020 to 2021, this Alert just summarizes those changes, rather than attaching an annotated version of the form.

Changes to the 2021 Form 990-T, schedules and instructions

The 2021 Form 990-T predominantly includes updates to reflect the final IRC Section 512(a)(6) regulations; changes of note include the following:

1. Organizations with tax years beginning on or after July 2, 2019 must electronically file their Forms 990-T for those tax years. Accordingly, the instructions removed all paper filing details.
2. Item B: The instructions now detail that colleges and universities not recognized by the IRS as exempt under IRC Section 501(c)(3) should check "501(c) corporation" in Block G on page 1 of the form and not complete Block B.
3. Item G: The form and instructions removed reference to applicable reinsurance entities described in IRC Section 1341(c)(1) of the Affordable Care Act, which were temporary, federally administered risk programs that are no longer in operation. References to applicable reinsurance entities were removed throughout the instructions.
4. Other forms that may be required (instructions)
1. Form 461, Limitation on Business Losses, is added back to the list of forms. The Coronavirus Aid, Relief, and Economic Security (CARES) Act repealed IRC Section 461 for tax years 2018, 2019 and 2020 only.
2. Form 5884-D, Employee Retention Credit for Certain Tax-Exempt Organizations Affected by Qualified Disasters, was added to list of forms. This is a new form created in response to the CARES Act.
3. Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, was removed from the list of forms because taxpayers should instead be attaching Form 965-A or 965-B, depending on how they are treated for tax purposes.
5. Part II, line 4 (Other tax amounts): The instructions previously contained a broad instruction to use this line for all other tax amounts not reported in Part III, line 3 (Other amounts due). The new instruction includes detailed examples of what taxes should be included here (e.g., erosion minimum tax, deferred IRC Section 1291 tax, etc.) but also notes that the deferred tax under IRC Section 1294 should be reported in Part III, line 3. Based on examples provided, tax-exempt entities should perform a detailed analysis to determine whether additional taxes/adjustments should be reported on Part II, line 4 or Part III, line 3.
6. Part III, line 5: The instructions note that IRC Section 965 installment payments should no longer be made through Form 990-T and should be paid through separate vouchers.
7. Part IV, line 4: Part IV, line 4 previously asked whether the organization changed its method of accounting. This question has been moved to new Part IV, line 6. Now Part IV, line 4 is being used to track pre-2018 NOLs carried over to the 2021 tax year.
8. Part IV, line 5: New Part IV, line 5 requires tracking and reporting of post-2017 NOL carryovers within each separate unrelated trade or business silo, consistent with IRC Section 512(a)(6).
9. Schedule A: The instructions added details on how organizations determine if they have more than one unrelated trade or business, consistent with final IRC Section 512(a)(6) regulations.
10. Schedule A: If an organization changed the 2-digit NAICS code used to report a particular unrelated trade or business in the current year, the instructions require the organization to explain why it made that change. Although the final IRC Section 512(a)(6) regulations no longer prohibit changing the 2-digit NAICS code of a particular trade or business, an organization that does so must treat the change as terminating the prior activity and commencing a new activity and suspend NOLs from the prior activity in the prior 2-digit code/silo. Any suspended NOLs may be used if a new unrelated trade or business (1) is accurately identified using the same NAICS 2-digit code as the previous separate unrelated trade or business; and (2) commences or is acquired in a future tax year.
11. Schedule A, Part II, line 17: The instructions removed the description of temporary NOL modifications in the CARES Act, including suspension of the 80% limitation and 5-year NOL carryback, which were effective only for tax years 2018, 2019 and 2020.
12. Schedule A, Non-NAICS Business Activity Codes: The final IRC Section 512(a)(6) regulations were not in effect for tax year 2020. The language in the instructions has been updated to require reporting of 2-digit NAICS codes for tax year 2021; references to the "transition-rule" for partnership interests have been removed, because the transition rule does not apply for tax year 2021.

Changes to the 2021 Form 4720 and instructions

Although most of the changes to the 2021 Form 4720 and instructions consist of minor clarifications and updates; changes of note include the following:

1. Although not all organizations are required to file Form 4720 electronically, Form 4720 instructions indicate that organizations may choose to file electronically. The instructions remind filers that Treas. Reg. Section 1.6033-2(a)(2)(ii)(J) requires private foundations to report information required by Form 4720 as part of their information reporting requirement under IRC Section 6033. Therefore, private foundations reporting required information on liability for tax imposed under Chapter 42 on the Form 4720 (Schedules A-F, J, or N) must file this form electronically.
2. Page 1: Item B was updated to require an entity or person subject to tax and required to file Form 4720 for more than one organization in the current year to attach a list showing the name and EIN for each organization for which a Form 420 will be filed for the current tax year.
3. Page 1: As item B is no longer used to collect information about corrective action made (or not made) on taxable events, the Form 4720 now requests information about those corrections in each of Schedules A, B, C, D, E, F or I. For each transaction to which an initial tax applies under IRC Sections 4941, 4942, 4943, 4944, 4945, 4955 or 4958, the organization or any other entity or person required to file Form 4720 to report one or more such transactions must indicate whether a correction has been made (or not) on the schedule where each transaction is reported.

Implications

The updates to the 2021 Forms 990-T and 4720 and their schedules and instructions continue to reflect changes to federal tax laws, regulations and guidance affecting tax-exempt organizations. The Form 990-T updates reflect the IRC Section 512(a)(6) final regulations, requiring unrelated trades or businesses to be tracked separately, and provide a clear method of tracking both pre-2018 and post-2017 net operating losses by 2-digit NAICS codes.

Tax-exempt organizations should pay close attention to how they determine which 2-digit NAICS code to use for each of their unrelated trades or business. As the instructions remind filers, a tax-exempt organization that changes a 2-digit NAICS code used to report a particular unrelated trade or business in a preceding year must explain why that change was made. Additionally, any changes to NAICS codes are considered to be termination of the prior activity and commencement of a new activity; as such, any NOLs reported in the prior NAICS code must be suspended until the same 2-digit NAICS code is used again in a future tax year.

The updates to Form 4720 focus on clearly tracking whether corrective action has been taken or explaining why such action has not been taken. Filers should document all details of corrective actions in anticipation of filing Form 4720. Failing to correct the action will result in continuation of the tax period and, as such, should be addressed as early as possible.

Tax-exempt organizations should continue to complete Form 990-T and Form 4720 according to their instructions, ensure that reporting complies with federal tax law, and consult their software providers early to confirm the ability to file these returns electronically.

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

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ATTACHMENTS

Form 990-T Forms Annotated

Form 990-T Instructions Annotated