Draft instructions released for the revised Form 990-T and Schedule A

| 12/17/2020
Draft instructions released for the revised Form 990-T and Schedule A

On Dec. 2, 2020, the IRS released draft instructions for the 2020 Form 990-T, “Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e)).” The draft instructions provide early insight about the reporting requirements on the 2020 Form 990-T and the accompanying Schedule A, “Unrelated Business Taxable Income From an Unrelated Trade or Business.”

The IRS released in September 2020 draft versions of the 2020 Form 990-T and Schedule A. The forms include significant changes to reflect IRC Section 512(a)(6), which was enacted by the Tax Cuts and Jobs Act of 2017. Section 512(a)(6) requires exempt organizations to calculate unrelated business taxable income (UBTI) separately with respect to each trade or business and provides that losses from one unrelated trade or business cannot offset gains from another. Though final Section 512(a)(6) regulations were published in November 2020, the instructions for Form 990-T and Schedule A reflected prior guidance.

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Following is an overview of the changes in the 2020 draft Form 990-T, Schedule A, and instructions.

Form 990-T

The Form 990-T has been completely overhauled:

  • Total UBTI and the total tax will be calculated on Page 1 instead of Page 2.
  • The new Schedule A replaces Schedule M for reporting separate trades or businesses in accordance with Section 512(a)(6).
  • The core Form 990-T itself serves as a summary return consisting of only three pages. It requires taxpayers to complete a corresponding Schedule A for each trade or business, whether they have one or 20. This requirement means that Form 990-T must include at least one Schedule A.
  • Part I, line 6 no longer includes a reference to net operating losses (NOLs) “arising in tax years beginning before Jan. 1, 2018.” However, the instructions clarify that NOLs arising in tax years beginning before Jan. 1, 2018, should be reported on line 6.
  • Part IV includes a new line 4. An organization that changes its accounting method should complete lines 4a and 4b and, if necessary, Part V.

Schedule A

The highlights of Schedule A, which replaces Schedule M, are as follows:

  • Line 17 no longer includes a reference to NOLs “arising in tax years beginning on or after Jan. 1, 2018.” However, the instructions clarify that NOLs arising in tax years beginning on or after Jan. 1, 2018, should be reported on line 17.
  • Part VI relates to interest, annuities, royalties, and rents from a controlled organization. It replaces Schedule F.
  • Part VII relates to investment income of a Section 501(c)(7), (9), or (17) organization. It replaces Schedule G.
  • Part VIII relates to exploited exempt activity income, other than advertising income. It replaces Schedule I and includes formatting and layout changes.
  • Part IX relates to advertising income. It replaces Schedule J and includes formatting and layout changes. Additionally, there no longer are separate sections for periodicals reported on a consolidated basis versus a separate basis.
  • Part X relates to compensation of officers, directors, and trustees. It replaces Schedule K.

Instructions

Following are highlights of the draft instructions:

  • Mandatory electronic filing. Mandatory electronic filing of the 2020 Form 990-T will begin in February 2021. Limited exceptions will apply.
  • NOL carryback. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides that losses arising in a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2021, can be carried back to the five taxable years preceding the taxable year of such loss, which includes taxable years prior to the enactment of Section 512(a)(6).
  • Form 990-T, Part I. The sum of positive amounts from all Schedule As should be reported.
  • Schedule A. Under Section 512(a)(6):
    • UBTI, including for purposes of determining any NOL deduction, should be computed separately with respect to each trade or business and without regard to Section 512(b)(12) (allowing a specific deduction of $1,000).
    • An exempt organization no longer is permitted to aggregate income and deductions from all unrelated trades or business when calculating UBTI. The draft instructions, which refer to the proposed regulations rather than the final regulations, provide that an identification method based on the first two digits of the North American Industry Classification System (NAICS) codes is a reasonable method of determining separate trades and businesses.
  • Expense allocation. Consistent with the proposed and final Section 512(a)(6) regulations, the allocation of expenses, depreciation, and similar items using an unadjusted gross-to-gross method is not reasonable if the cost of providing the good or service is substantially the same for related and unrelated activities but the price charged for each differs.
  • Schedule A, item C. The business activity code that best describes an organization’s unrelated trade or business should be entered in this section. Trailing zeros should be added to codes between two and five digits long to comply with e-filing requirements to complete the six-character field.
  • Schedule A, line 17. Under the CARES Act, losses arising in a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2021, can be carried back to the five taxable years preceding the taxable year of such loss, which includes taxable years prior to the enactment of Section 512(a)(6). The draft instructions provide that an organization eligible to carry an NOL back to a prior year must file an amended Form 990-T. Form 1045 and Form 1139 can’t be used for this purpose, though these forms may be attached to the amended Form 990-T to show the NOL computation.

Further changes to the 2020 Form 990-T instructions are expected to reflect the final Section 512(a)(6) regulations. Nonetheless, the draft Form 990-T, Schedule A, and instructions allow tax-exempt entities and their advisers to prepare for significant reporting changes that will be required for the 2020 tax year.

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