Unrelated Business (“UBIT”) Income Tax Silos – Taxation

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United States: Unrelated Business Income Tax Silos (“UBIT”)

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The Treasury Department has now finalized the silo regulations UBIT.

In late 2017, Congress amended the UBIT Rules to include the new Section 512(a)(6). Prior to 2018, exempt organizations could offset all of their unrelated business income against all of their losses from unrelated business activities and pay tax only on the overall net gain, if any. Silo rules were designed to isolate each unrelated business activity and prohibit an organization from using the losses of one activity against the gains of another.

However, as is often the case in tax law, the devil is in the details. The IRS issued draft guidance in Notice 2018-67 in August 2018 and proposed regulations in April 2020. For those of you who followed the guidance, the final regulations adopt most, but not all, of proposed regulations. For example, unrelated activities of an exempt organization will be classified based on a two-digit code NAICS codes. The regulations also provide special rules for investments in partnerships and limited liability companies, where the income of the partnership or LLC is reported to the exempt organization and taxable for it.

A more detailed analysis of the extensive regulations is beyond the scope of this article, but the message for our friends and clients is: if you have unrelated business revenue activities or significant investments in partnerships, talk to your tax preparer or attorney now so you can be prepared to track and report under these new regulations.

Originally published November 30, 2020

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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