Enacted as part of the Tax Cuts and Jobs Act in 2017, Section 512(a)(6) of the Internal Revenue Code (IRC) provides that an exempt organization subject to unrelated business income tax with more than one unrelated trade or business is required to calculate unrelated business income (UBI) separately for each trade or business. This also includes the calculation and silo of net operating losses (NOL) assigned to each separate unrelated trade or business.
These requirements became effective for tax years beginning after December 31, 2017. Any NOLs that an exempt organization had prior to December 31, 2017 may be used offset all future net unrelated business income. On March 27, 2020, Congress amended the CARES Act (Coronavirus Aid, Relief, and Economic Security Act 2020) to allow any NOL arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to be carried back five years preceding the taxable year of such loss (CARES Act NOL). The five-year period includes the years prior to the enactment of the new IRC section 512(a)(6), when unrelated trades or businesses were calculated and reported in the aggregate as opposed to siloed.
On June 8, the IRS provided guidance on how to apply CARES Act NOLs. In their FAQ section on the topic, the agency clarified that CARES Act NOLs arising in taxable years beginning after December 31, 2017 must be siloed. It also notes that a tax-exempt organization subject to section 512(a)(6) can carry back CARES Act NOLs against aggregate UBI in a taxable year beginning before January 1, 2018 because the section does not apply to such taxable years. An exempt organization, meanwhile, may carry back CARES Act NOLs attributable to an unrelated trade or business even if the exempt organization would not have had a CARES Act NOL, or if the deduction in the relevant taxable year was calculated on an aggregate basis. Exempt organizations are also not allowed to deduct CARES Act NOLs against aggregate UBI in taxable years beginning after December 31, 2017. When doing so, CARES Act NOLs must be siloed consistent with section 512(a)(6).
If you have questions on the NOL Carrybacks, please contact any of our exempt organization experts.
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