It’s been three long years since Congress ambushed the nonprofit sector in its headlong rush to get huge tax cuts approved by the end of December 2017. 

The ill-conceived and sloppily drafted legislation was cobbled together in a 51-vote budget-reconciliation maneuver in the Senate; the aim was to snag just enough “yes” votes without losing too many possible “no” votes. 

Apparently, few legislators read much of the massive Tax Cuts and Jobs Act of 2017 (TCJA ‘17) bill before voting on it; some later acknowledged being “surprised” when they discovered some of the contents. To add insult to injury, the legislation managers generally omitted the customary transition periods for new or substantially amended statutes. They went into effect on January 1, 2018.

In addition to the dramatic and unwelcome broadening of eligibility for the standard deduction (which lowered the number of itemizers including those claiming the charitable deduction), there were four troublesome new statutes in the Internal Revenue Code directly affecting tax-exempt organizations.

  • (New) Net Investment Income Excise Tax, Internal Revenue Code section 4968 
  • (New) Unrelated Business Income Tax (UBIT) “Silo” Rules, Internal Revenue Code section 512(a)(6) 
  • (New) Excess Compensation Excise Tax, Internal Revenue Code section 4960 (January 19, 2020
  • (New) Tax on Transportation-Related Fringe Benefits, Internal Revenue Code section 512(a)(7)

In the past three years, we’ve covered the development and approval of guidance from Treasury/IRS from early interim advice through proposed regulations and interaction with the interested parties through public-comment periods for the first three. At long last, there are now final regulations published in the Federal Register and currently in effect.  

We’ve already discussed the final regulations for the section 4968 excise tax on net investment income. See Final “Net Investment Income” Excise Regs (September 21, 2020).

In this post, we’ll review the final regs for the new UBIT silo rules of section 512(a)(6). They were published in the Federal Register on December 2, 2020. In the next post, we’ll cover the just-published final regs (January 19, 2021) for the excess compensation excise tax of section 4960.

Until Congress – out of the blue – inserted an entirely new and different rule into the TCJA ‘17, a nonprofit with multiple unrelated “trades or businesses” was allowed to lump them all together for the purpose of calculating the annual UBIT owed. That is to say, the organization could aggregate deductions related to one busines 

The fourth new statute – the biggest stinker of the lot – is (thankfully) out of the picture. Sometimes, a truly awful piece of legislation like this “reviled nonprofit parking tax” will miraculously disappear. See Poof! The Nonprofit Parking Tax Is Gone (January 7, 2020). 

That’s what happened here to this legislation that “never made sense to anyone and that forced thousands of front-line nonprofits to divert two years of attention and millions of dollars away from their missions.” Legislators (who reportedly agreed with this assessment) buried its ignominious – and retroactive – repeal under layers and layers of obscure measures packed into a must-pass, eleventh-hour, Congressional appropriations package enacted to avert an imminent government shutdown. 

A year later, the IRS is still trying to figure out how to refund the UBIT taxes paid by the many organizations around the nation who wasted time and money dutifully complying with this ridiculous law. See Feds‌ ‌To‌ ‌Refund‌ ‌Repealed‌ ‌Transportation‌ ‌UBIT‌‌ ‌‌(January‌ ‌19,‌ ‌2021)‌ The Nonprofit Times.

       UBIT Silo Statute

The unrelated business income tax provisions of the Internal Revenue Code have been in place for decades. Many tax-exempt organizations have long conducted business activities to raise necessary revenue to support their missions. 

Under a complex set of rules (see Internal Revenue Code sections, these activities are divided into “related” business activities and “unrelated” business activities. See Publication 598, Tax on Unrelated Business Income of Exempt Organizations (Rev. February 2019). In the case of “unrelated business income” (UBI), the sponsoring exempt organization must file a Form 990-T and pay a tax (s to offset income earned by a second (or third) business. This procedure often resulted in substantial savings. 

But federal legislators changed this rule by adding new section 512(a)(6) of the Internal Revenue Code. Suddenly – and immediately – a nonprofit with multiple unrelated businesses was required to calculate gains and losses for each “trade or business” separately. That is to say – using the new statutory language – the nonprofit must “silo” revenue and expenses for each distinct business. See New Unrelated Business Income Rules (June 19, 2018).

       Preliminary Guidance 

The Treasury Department and its agency, the Internal Revenue Service, recognized the upheaval hoisted upon the nonprofit community with this dramatic and sudden change. Congress did not include the customary transition period offered with new legislation.  “On January 1, 2018, the nonprofit community and its advisers faced difficult compliance duties with little or no guidance from the government beyond the wording of the new … statute.” For instance, what is a “separate” and distinct trade or business in the deceptively simple (new) section 512(a)(6)? 

While federal tax officials fielded questions and complaints about the meaning and application of these new UBIT silo rules, they mulled over what to include in proposed regulations. As an interim measure pending publication of proposed regulations, on August 21, 2018, the Internal Revenue Service issued Notice 2018-67. “This notice discusses, and solicits comments regarding, various issues arising under § 512(a)(6) and sets forth interim guidance and transition rules relating to that section.” See our discussion in New UBIT Changes: Interim Guidance (September 28, 2018).

A key feature of Notice 2018-67 is the reference to a standard already in existence, the North American Industry Classification System (NAICS). That system, with a 6-digit code-number method, is used for collecting and analyzing statistical data on the United States business economy. 

Under this interim guidance, nonprofits were advised they should self-identify the proper separate categories for each business activity. The government offered a temporary safe harbor: An organization would be allowed to rely on its own “reasonable, good-faith interpretation” of section 512(a)(6) to determine whether it had more than a single line of business and to apply the NCAIS 6-digit code system.  

The government included the standard Request for Comments in Notice 2018-67, and acknowledged the shortcomings of the new law: “There is no general statutory or regulatory definition defining what constitutes a ‘trade or business’ for purposes of the Internal Revenue Code so until final regulations are issued, possibly in 2019, this is an area fraught with confusion and many questions.”

The final caution in the Notice is that “this is not a final or complete explanation of the new UBIT-related statutes; eventually, the Treasury Department will issue more complete and definitive regulations.”

       Proposed Regulations 

Federal officials got an earful in the public-comment period on Notice 2018-67. Most particularly, responding organizations and experts pointed out the shortcomings of using the NCAIS 6-digit system; specifically, they were being asked to break “down their various unrelated business income into dozens or even hundreds of separate categories, leading to burdensome compliance costs, inconsistency, and arbitrariness.”

It took over a year for the government to settle on, and publish, proposed regulations on April 24, 2020, Unrelated Business Taxable Income Separately Computed for Each Trade or Business

See our discussion in New UBIT “Silo” Proposed Regulations (June 3, 2020). The key change between Notice 2018-67 and the proposed regulations issued some eighteen months later is the reduction in the number of categories to determine whether there is just one or more distinct trades or businesses. This is accomplished by reference to just the first two digits of the NCAIS system (instead of the full six digits). That change collapses the menu to just about 20 categories. In addition, an organization is permitted to group certain related types of activities together. For instance, the nonprofit may group all types of accommodations and food services businesses into a single category. 

The notice of proposed regulations offered the interested public the customary 60-day public-comment period. There was more pushback against even the 20-category selection as a whole, and some of the smaller details. 

The proposed rules are “perhaps the least bad option for implementing a very bad law,” according to David Thompson, vice president for public policy at the National Council of Nonprofits in Washington, D.C. 

        Final UBIT Regs

The final regulations, at T.D. 9933, published on December 2, 2020,  “generally follow the approach taken” in the proposed regulations” issued in April 2020, “although a few modifications were made in response to comments.” And following the proposed regulations, too, an organization is permitted to treat most investment activity as a single trade or business.

The final regulations provide additional guidance on how to identify separate trades or businesses along with how to calculate the UBIT amount. 

There is a helpful summary in the Journal of Accountancy by Alistair M. Nevius, J.D., (November 20, 2020) which includes additional key points:  Additional key points are: 

  • The organization must calculate UBIT separately for each unrelated trade or business, “without regard to the specific deduction in section 512(b)(12), including for purposes of determining any net operating loss (NOL) deduction.” 
  • An exempt organization … “must allocate deductions between separate unrelated trades or businesses using the reasonable-basis standard described in Regs. Sec. 1.512(a)-1(c).”
  • “[Q]ualifying partnership interests, qualifying S corporation interests, and certain debt-financed properties may be treated as separate unrelated trades or businesses for purposes of Sec. 512(a)(6).”

Two issues that the government, in the April 2020 proposed regulations, reserved for decision were not decided in the final regulations. “The IRS anticipates issuing proposed regulations on these issues in the future.”  They are: 

  1. The “allocation of expenses, depreciation, and similar items that are shared between an exempt activity and an unrelated trade or business or between more than one unrelated trade or business.”
  2.  Changes in the section 172 NOL deduction made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in April 2020. 


The final regulations apply to taxable years beginning on or after the date of publication in the Federal Register; that is, December 2, 2020. There are two alternatives. First, an organization may choose to apply them to earlier taxable years beginning on or after January 1, 2018. Second, an organization may rely on a reasonable, good-faith interpretation of section 512(a)(6) for such taxable years. 

            — Linda J. Rosenthal, J.D., FPLG Information & Research Director  

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