09/20/2018

IRS Notice 2018-67 Regarding Separate Trade or Business Activities

Please read this article from OSAE Member Clark Schaefer Hackett

The 2017 Tax Cuts and Jobs Act (TJCA) contained a provision that disallows exempt entities with multiple unrelated trades or businesses from deducting the losses from one unrelated business against the income from another, separate trade or business. However, clarification is needed when it comes to distinguishing what constitutes as a separate trade or business (“siloing”). The Treasury intends to provide regulations that resolve any lingering confusion. In the interim, the Internal Revenue Service (IRS) has issued Notice 2018-67 (The Notice) which provides some limited guidance on complying with the new Unrelated Business Taxable Income (UBTI) rules.

The Notice states that taxpayers may rely on reasonable, good-faith interpretation of what a separate trade or business is, and may use the North American Industry Classification System (NAICS) as a guide. Therefore, if two activities have different codes within the NAICS system, they would need to be treated as separate activities. Additionally, it suggests the use of the fragmentation principle under Reg Section 1.513-1(b). This principle states that an unrelated activity does not lose its identity as unrelated because it occurs within a larger, related activity.

The Notice does not indicate how to handle items such as debt financed properties, or payments from controlled corporations. For example, is each rental property considered a separate trade or business, or should income from all debt financed property be aggregated and treated as a single trade or business? The Notice does indicate that separate treatment of each debt financed property would be an administrative burden, and that there might be circumstances where aggregation would be appropriate. Due to the uncertainty in this area, the Notice requests comments regarding the treatment of unrelated income as defined in Sections 512(b)(4), (13) and (17). These code sections refer to debt financed income, income from controlled entities and income from foreign controlled entities.

Please select this link to read the complete article from OSAE Member Clark Schaefer Hackett (CSH).