Last week, the IRS issued proposed regulations, which will help to simplify the rules around how not-for-profit entities should calculate their unrelated business income tax (UBIT) for more than one unrelated trade or business.

close up angle of three people sitting at a wooden table near a window overlooking the city with pens and notepads; image used for blog post for IRS new regulations for not-for-profits UBIT calculation

UBIT is applicable to any trade or business activity a not-for-profit engages in that is not substantially related to the tax-exempt purposes of the organization.

As part of the 2017 Tax Cuts and Jobs Act (TCJA), there is a provision which requires not-for-profits to calculate UBIT separately for each trade or business. For those organizations with many diverse income streams, this change created many challenges and complications.

The newly proposed regulations from the IRS provide clarity on identifying separate trades or businesses and offered a way for certain income streams to be combined.

The classification system used is the North American Industry Classification System (NAICS). The NAICS uses six-digit codes to identify the business purposes of an activity. Initial guidance from the IRS implied that only activities with the same six-digit codes, of which there are over 1,000, could be combined. This led to not-for-profit entities fearing they would have to break down their various unrelated trades or businesses into an unreasonably large number of separate categories, causing unnecessary burden.

With welcomed relief, these newly proposed regulations now state that income can be combined for activities with the same first two digits of their respective NAICS codes, rather than needing to match all six digits. The first two digits of an activity’s NAICS code represents the sector, the general category of economic activity, in which it is involved. This limits the potential number of income streams not-for-profits must divide into a maximum of 20 categories.

To read more about the proposed regulations, visit the following link: https://s3.amazonaws.com/public-inspection.federalregister.gov/2020-06604.pdf