Tax-exempt organizations will be able to carry back siloed net operating losses (NOLs) to offset unrelated business taxable income (UBTI) that had been calculated earlier on an aggregate basis, according to guidance issued on June 8, 2020, by the IRS.
CARES Act Changes
The 2017 tax reform law, commonly referred to as the Tax Cuts and Jobs Act (TCJA), established Internal Revenue Code Section 512(b)(6), which requires tax-exempt organizations to silo UBTI—calculating it separately for each unrelated business activity including the calculation of any NOLs. Prior to the TCJA, tax-exempt organizations were allowed to aggregate all unrelated business activities. The TCJA also eliminated the carryback of newly generated NOLs.
With the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, any NOL generated in a taxable year beginning after December 31, 2017, and before January 1, 2021, can be carried back for five years. However, the CARES Act didn’t address if tax-exempt organizations could carry back the siloed NOLs to years that had aggregated UBTI.
IRS Guidance
Under the guidance, provided as FAQs on the IRS website, exempt organizations are allowed to carry back siloed NOLs to offset aggregate UBTI in a taxable year before January 1, 2018. However, if any siloed NOLs remain after being carried back, exempt organizations aren’t able to use them against aggregate UBTI generated in taxable years beginning after December 31, 2017.
The IRS FAQs can be found here.
We’re Here to Help
If you have any questions about how your tax-exempt organization can apply the NOL carrybacks outlined above, please contact your Moss Adams professional.