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Final regs. govern computation of UBTI for separate businesses

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The IRS posted an advance copy of final regulations that provide guidance on how an exempt organization subject to the unrelated business income tax (UBIT) determines if it has more than one unrelated trade or business (T.D. 9933). The regulations also discuss how an exempt organization calculates unrelated business taxable income (UBTI) if it has more than one unrelated trade or business.

T.D. 9933 finalizes, with modifications, regulations that were proposed in April (REG-106864-18).

Under Sec. 512(a)(6), enacted by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, tax-exempt organizations subject to tax on UBTI must calculate UBTI separately for each business — or “silo” revenue and expenses for each separate business.

The final regulations provide that an exempt organization with more than one unrelated trade or business must compute UBTI separately with respect to each unrelated trade or business, without regard to the specific deduction in Sec. 512(b)(12), including for purposes of determining any net operating loss (NOL) deduction. The regulations generally provided that an exempt organization must identify each of its separate unrelated trades or businesses using the first two digits of the North American Industry Classification System code (NAICS 2-digit code) that most accurately describes the unrelated trade or business.

An exempt organization with more than one unrelated trade or business must allocate deductions between separate unrelated trades or businesses using the reasonable-basis standard described in Regs. Sec. 1.512(a)-1(c).

The final regulations treat an exempt organization’s investment activities that are subject to UBIT as a separate trade or business for purposes of Sec. 512(a)(6). However, qualifying 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).

April’s proposed regulations had reserved two issues for further consideration: The first involves 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. The second issue relates to changes made to the Sec. 172 NOL deduction by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The IRS anticipates issuing proposed regulations on these issues in the future.

The regulations have been sent to the Federal Register for publication and will be effective on the date of publication.

IRS commissioner: Penalty relief will not be ‘blanket’

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The IRS’s response to the COVID-19 pandemic has included focused relief from tax penalties, but taxpayers and tax professionals should not expect a “blanket” approach, IRS Commissioner Charles Rettig told CPAs on Tuesday.

Rettig addressed penalties, among other pandemic recovery and longer-term priorities for the Service, during his address to the AICPA National Tax & Sophisticated Tax Online Conference. He was joined by other top IRS officials who described the activities and outlook of their operating divisions and offices.

“We took a look at global relief,” Rettig said, both from the viewpoint of struggling taxpayers and practitioners and the IRS’s own responsibilities under the law, and concluded that the Service rather should focus on specific procedures already available to taxpayers, including reasonable-cause defenses and the first-time abatement of penalties.

“We get it that you would like to have blanket relief,” Rettig said. “It is not going to happen, and I think if you were sitting in my chair or Chief Counsel Mike Desmond’s chair or others’ chairs, you would be able to look at it as we do.”

In a Nov. 5 letter to Rettig and David Kautter, Treasury assistant secretary for tax policy, the AICPA did not request “blanket relief” but rather advocated expedited and streamlined reasonable-cause penalty abatement processes for taxpayers affected by the coronavirus and for the IRS to provide specific examples of qualifying reasonable-cause abatement situations and a dedicated telephone line for taxpayers or their advisers to request coronavirus-related penalty relief. Edward Karl, AICPA vice president–Taxation, remarked: “This year, of all years, the IRS should provide relief for uncontrollable COVID-19 impacts. We are greatly disappointed to not have a favorable resolution at this time that could help unburden taxpayers.”

IRS doubles down on nondeductibility of PPP-funded expenses

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In guidance issued late on Wednesday, the IRS reiterated its position that taxpayers cannot claim a deduction for any otherwise deductible expense if the payment of the expense results in forgiveness of a Paycheck Protection Program (PPP) loan because the income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The guidance came in the form of a revenue ruling (Rev. Rul. 2020-27), which addresses the issue of borrowers who pay expenses in 2020 but whose PPP loan is not forgiven until 2021, and a revenue procedure (Rev. Proc. 2020-51) that provides a safe harbor for PPP borrowers that have their loan forgiveness denied or who choose not to request loan forgiveness.

Under Section 1106(b) of the CARES Act, an eligible recipient of a covered PPP loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the covered period beginning on the covered loan’s origination date: (1) payroll costs; (2) any payment of interest on any covered mortgage obligation; (3) any payment on any covered rent obligation; and (4) any covered utility payment. Section 1106(i) excludes from gross income any amount forgiven under the PPP.

In May, the IRS issued Notice 2020-32, providing that a taxpayer that receives a loan through the PPP is not permitted to deduct expenses that are normally deductible under the Code to the extent the payment of those expenses results in loan forgiveness under the CARES Act.

The CARES Act itself does not address whether deductions otherwise allowable under the Code for payments of eligible CARES Act Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven. The AICPA believes that the IRS’s interpretation denying deductions of expenses forgiven under the PPP program is contrary to Congress’s intent.

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