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IRS provides FAQs on NOL carrybacks by certain exempt organizations

FAQs on NOL carrybacks by certain exempt organizations

The IRS today provided a list of “frequently asked questions” (FAQs) concerning net operating loss (NOL) carrybacks by certain exempt organizations.

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The preface to the FAQs explains that an exempt organization may engage in more than one unrelated trade or business.

  • Before the 2017 tax law, an exempt organization deriving gross income from the regular conduct of two or more unrelated trades or businesses calculated unrelated business taxable income (UBTI) by determining its aggregate gross income from all such unrelated trades or businesses and reducing that amount by the aggregate deductions allowed with respect to all such unrelated trades or businesses.
  • Section 512(a)(6) was added to the Code by the 2017 tax law (Pub. L. No. 115-97, known commonly as the “Tax Cuts and Jobs Act” (TCJA)) to amend this treatment for exempt organizations with more than one unrelated trade or business. Section 512(a)(6) requires an organization subject to the unrelated business income tax, with more than one unrelated trade or business, to calculate the UBTI separately, including for purposes of calculating any NOL deduction, with respect to each such trade or business in tax years beginning after December 31, 2017. This is referred to as "siloing.”
  • The TCJA made changes to section 172 regarding the NOL deduction, including generally repealing NOL carrybacks (except with respect to certain farming losses and to certain insurance companies) while permitting indefinite carryforwards.
  • Code section 172 was amended by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136) to provide that any NOL arising in a tax year beginning after December 31, 2017, and before January 1, 2021—these are referred to as “CARES Act NOLs”— may be carried to the five tax years preceding the tax year of such loss, which includes tax years prior to the enactment of section 512(a)(6).

The FAQs (updated June 8, 2020) provide answers to questions concerning the intersection of the CARES Act NOLs with the UBTI rules.

Below is text of the three FAQs.
 

Q1. In determining the UBTI of an exempt organization with more than one unrelated trade or business in a taxable year beginning after December 31, 2017, are CARES Act NOLs required to be siloed so that each unrelated trade or business calculates its NOL separately?

A1. Yes. In determining the UBTI in taxable years beginning after December 31, 2017, section 512(a)(6) requires an exempt organization with more than one unrelated trade or business to silo NOLs arising in taxable years beginning after December 31, 2017, so that each trade or business calculates its NOL separately. CARES Act NOLs arise in taxable years beginning after December 31, 2017, and therefore must be siloed.
 

Q2. Can an exempt organization subject to section 512(a)(6), and that has CARES Act NOLs, carry back and deduct those NOLs against the aggregate UBTI in a taxable year beginning before January 1, 2018?

A2. Yes. An exempt organization subject to section 512(a)(6) can deduct CARES Act NOLs against the aggregate UBTI in a taxable year beginning before January 1, 2018, when carrying the NOL back to such taxable year because section 512(a)(6) does not apply to such taxable year. Also, an exempt organization may carry back CARES Act NOLs attributable to an unrelated trade or business, even if the exempt organization would not have had a CARES Act NOL if the deduction in the relevant taxable year were calculated on an aggregate basis.
 

Q3. Can an exempt organization deduct CARES Act NOLs against aggregate UBTI in taxable years beginning after December 31, 2017, if any CARES Act NOLs remain after being carried back to taxable years beginning before January 1, 2018?

A3. No. The special rule in section 13702(b)(2) of the TCJA that allows NOLs arising in taxable years beginning before January 1, 2018, to be deducted against aggregate UBTI does not apply to CARES Act NOLs because those NOLs arise in taxable years beginning after December 31, 2017. Accordingly, when deducting CARES Act NOLs against UBTI in taxable years beginning after December 31, 2017, the CARES Act NOLs must be siloed consistent with section 512(a)(6).

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | +1 202 533 3800 | ruthmadrigal@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com 

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