New "Silo" Rules for Unrelated Business Income

By Katie New, CPA

Any tax-exempt organization with a taxable year starting after January 1, 2018, will be subject to the new laws under the Tax Cuts and Jobs Act of 2017. One of the major changes is the new “silo” rules for unrelated business income (UBI). Any tax-exempt organization with more than one UBI stream may need to adjust their tax calculation methods used in previous years.

Before January 1, 2018, each unrelated business activity’s income or loss was calculated and subsequently netted together, regardless if they were similar activities. For example, XYZ Foundation had unrelated business activity “A” with unrelated business taxable income (UBTI) of $5,000 and another unrelated business activity “B” with the UBTI calculated as a net loss of $2,000. On the Form 990-T UBTI was a positive $3,000 and tax was computed on this number.

The new rules no longer allow aggregation of income and deductions from all sources. Going forward, each activity’s UBTI will be calculated separately, hence the term “silo”. Using the same details in the example above, the UBTI will be $5,000 for activity A and $0 for activity B for the year. Activity B would have their own net operating loss (NOL) that can be used for their specific activity in the future (cannot be used for activity A). Tax would be calculated using the full $5,000.

The first step in preparing for this change will be identifying revenue streams and categorizing them into trades or businesses. Revenue streams that fall into the same trade or business can continue to be netted together. For example, web advertising and association newsletter advertising may continue to be combined, and any expenses related to these two incomes can be used to reduce either revenue stream. However, an association that rents out a portion of their building and provides services at this space (i.e. catering) and also has a revenue stream from advertising in their quarterly newsletter will now have two separate lines of UBTI. Each line will compute their respective UBTI and pay tax on each.

Unfortunately, tax-exempt organizations have not been provided criteria for determining whether an exempt organization has more than one unrelated trade or business or how to identify separate unrelated trades or businesses for purposes of calculating UBI. Until that time comes, exempt organizations can use a reasonable and good-faith method considering all the facts and circumstances. One suggested method includes using the North American Industry Classification System (NAICS) code.

Katie New, CPA | Manager
KNew@MHCScpa.com