Tax exempt organizations may not be 100% tax exempt. Organizations may get involved in certain income-producing activities that could be subject to tax (unrelated business taxable income or UBTI). Under the Tax Cuts and Jobs Act, the IRS began requiring tax exempt organizations to report the income and expenses from each unrelated business activity separately (if there is more than one) on the Form 990-T. Accordingly, tax is calculated for each activity separately and the net loss from one activity can’t offset the net income of another.
What if you have two or more unrelated business activities that are similar? How do you know if you have to separate them on the 990-T? Up until recently, that may not have been easy to determine. But in December, the IRS issued final regulations that help. Per those regulations, the organization must identify each of its separate unrelated business activities using the first two digits of the North American Industry Classification System (NAIC) code that most accurately describes the business. The NAIC is the standard used by federal statistical agencies to classify businesses for the purpose of collecting data (see census.gov/naics).
Let’s look at an example. An arts and cultural organization operates a gift store that sells items related to promoting its tax exempt mission, but also sells beauty products made by the store manager. In addition, the organization offers weekly computer classes to the community. Most likely both the sale of the beauty products and the classes are unrelated to the organization’s tax-exempt mission, and therefore are taxable activities. The NAIC code for retail sales is 44-45 (the beauty products) and the code for education (the classes) is 61 which shows that the income and associated expenses from each activity must be separately reported on the Form 990-T. If the sale of the products resulted in net income of $10,000 and the classes resulted in a net loss of $4,000, the organization would pay tax on the $10,000 and cannot net it against the $4,000 loss.
In addition to the above, the format of the Form 990-T has changed for 2020. If you have any questions about taxable income or other form 990 issues, contact your Henry+Horne advisor.
Colette Kamps, CPA