Siloing of Unrelated Business Income Is Creating Many Questions for Tax-Exempt Organizations

Not-for-Profit|Tax|Tax Reform

By Gene Logan

“Siloing” is the term being used to describe the 2017 tax reform change that requires exempt organizations to separate each of their unrelated business activities and only tax those with income.  I am not sure it is a real word.  It is fun to say and visualize, but beyond that, it is quite the challenge for exempt organizations.

Unrelated business taxable income (UBIT) is income from a trade or business regularly carried on by an exempt organization that is not substantially related to the organization’s charitable mission.  It can also include investment earnings, royalties, rents and gains on sales if debt was used to finance the activity.  Traditionally, exempt organizations were allowed to combine all their UBIT items on Form 990-T.  Loss activities would be used to offset gains from profitable activities to arrive at a net UBIT.

Under the 2017 Tax Cuts and Jobs Act, IRC Section 512(a)(6) was added to require exempt organizations to separately report each unrelated activity (siloing).  Only the activities that generated income would be taxed.  The Joint Committee on Taxation estimates that this change will result in $3.2 billion in increased revenue over the next 10 years.  The new rule is effective for tax years beginning after December 31, 2017.

Exempt organizations are struggling to determine how to identify a separate activity and how to allocate expenses on an-activity-by activity basis.  For example, if an organization has summer camp rentals, conference space rentals, and rental of its parking lots for outside events, can all of this be combined into one rental activity?  Or, does the organization need to track and report each rental activity separately?  The treatment of income from partnership investments is also unknown.  Can an organization combine and treat all UBIT from flow-through investments as one partnership activity?  Or, is the organization required to look through every partnership investment and separate each activity in a separate UBIT silo?

The Treasury Department has indicated it will issue more guidance “sooner rather than later” to help exempt organizations understand these new rules.  Elinor Ramey, an attorney-advisor in the Treasury’s Office of Tax Policy, said recently: “This is definitely something we need to issue guidance on; we would love comments on how people think it can be done, and done well, to match the intent of the law and administration both for taxpayers and for the IRS.”

Meanwhile, exempt organizations and practitioners are forced to make assumptions and best guesses on how to interpret and apply the new siloing rules.  This will be particularly challenging for calculating estimated tax payments before additional guidance is provided by the IRS.

If you have any questions on the changes to UBIT or the impact of the new law on exempt organizations, please feel free to contact us.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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