Article
New requirements for calculating UBTI for investment partnerships
Nov. 19, 2019 · Authored by Wendy Campos, Chad Schraufnagel
In August 2018, the IRS published Notice 2018-67 to provide interim guidance regarding the calculation of unrelated business taxable income (UBTI) for exempt organizations with more than one unrelated trade or business. The guidance also set out requirements for the aggregation of UBTI from investment partnerships.
Background
The 2017 tax reform reconciliation act, commonly referred to as the Tax Cuts and Jobs Act (TCJA), created IRC Section 512(a)(6). This section requires an exempt organization to compute UBTI separately for each of its trades or businesses for tax years beginning after Dec. 31, 2017.
With this change, a loss in one trade or business is no longer available to offset income in another trade or business. Investment partnerships must be considered in addition to all other sources of UBTI, including activities performed directly by the exempt organization.
IRS notice 2018-67
Until the publication of expected regulations, Notice 2018-67 allows an exempt organization to treat the following as one trade or business:
- UBTI from a single partnership that contains multiple trades or businesses as long as the directly held partnership interest meets the requirements of the de minimis or control test and was held as of Aug. 21, 2018. For example, the exempt organization holds a partnership interest that generates UBTI from a farming operation plus UBTI from a rental unrelated to the farming operation.
- UBTI from all partnerships meeting the de minimis or control test.
De minimis test and control test
A partnership interest meets the requirements of the de minimis or control test in the following ways:
- De minimis test — if an exempt organization holds no more than 2% of the profits interest and no more than 2% of the capital interest
- Control test — if an exempt organization holds no more than 20% of the capital interest and doesn’t have control or influence over the partnership
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.