The IRS has expanded its guidance on exempt organizations’ calculation of unrelated business taxable income (UBTI), and the ability to carry back net operating losses as a result of changes in the CARES Act.
As background, tax-exempt organizations are subject to taxation on UBTI, which is income from unrelated business activities that are regularly carried on. Exempt organizations may carry on multiple unrelated businesses—and prior to the Tax Cuts and Jobs Act of 2017, exempt organizations with multiple unrelated businesses would calculate UBTI on an aggregate basis, by determining gross income from all businesses and reducing that amount by allowable aggregate deductions.
The Tax Cuts and Jobs Act now requires exempt organizations with multiple activities to silo the calculation of UBTI for each particular trade or business. It also generally disallows NOL carrybacks, while permitting indefinite carryforwards.
However, the CARES Act changed up the rules a bit in this area. The CARES Act provides that any NOL arising in a year beginning after December 31, 2017 and before January 1, 2021, may be carried back to the five years preceding the tax year of such loss. This means NOLs can be carried back to years predating the Tax Cuts and Jobs Act, when UBTI was still permitted to be calculated on an aggregate basis.
In website FAQs and subsequent Associate Chief Counsel advice, the IRS has clarified that if an NOL is carried back to a year predating the Tax Cuts and Jobs Act (eg, to 2016), the NOL can be deducted against aggregated UBTI for that year. However, an NOL carried back to a year beginning after the Tax Cuts and Jobs Act (eg, 2018) would have to be siloed.