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Final Regulations Issued for Section 512(a)(6)

The IRS has issued final regulations regarding Internal Revenue Code section 512(a)(6). These regulations have been published in the Federal Register and are effective as of December 2, 2020.

Section 512(a)(6) was enacted with the 2017 Tax Cuts and Jobs Act and requires tax-exempt organizations to calculate unrelated business income tax (UBIT) separately for each trade or business. Each trade or business “silo” will be identified using the first two digits of the North American Industry Classification System code (NAICS) and used for a variety of purposes including determining net operating loss (NOL) deductions.

The final regulations treat an exempt organization’s investment activities subject to unrelated business income tax as a separate trade or business for purposes of Sec. 512(a)(6). Qualifying partnership or S corporation interests, and certain debt-financed properties may be treated as separate unrelated trades or businesses for purposes of Sec. 512(a)(6).

The regulations did leave two issues open for further guidance:

  • Allocation of expenses, deprecation and similar items between an exempt activity and unrelated trade or business or between two or more unrelated trades or businesses
  • Application of changes made to Internal Revenue Code section 172 NOL deduction by the Coronavirus Aid, Relief, and Economic Security (CARES) Act

Proposed regulations for these issues are expected in the future.

Please contact your local Blue & Co., LLC tax advisor if you have questions regarding the applicability of these final regulations to your organization.

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