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Special UBTI Rules for 990-T Fiscal Year Filers

July 02, 2019

Nonprofits, changes under the Tax Cuts and Jobs Act require tax exempt organizations with $1,000 or more in unrelated business income to apply a “blended” tax rate to calculate tax liability. Learn more.

Attention form 990-T fiscal year filers…did you know that due to changes under the Tax Cuts and Jobs Act (TCJA) you must apply a blended tax rate to unrelated business taxable income for the entire taxable year?

What is form 990-T?

Nonprofits, though tax-exempt, may still be liable for tax on their unrelated business income. Exempt organizations that have $1,000 or more of gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return.

What is UBTI?

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

  1. It is a trade or business,
  2. It is regularly carried on, and
  3. It is not substantially related to furthering the exempt purpose of the organization.

The income generated from these activities is called unrelated business taxable income (UBTI).

What did the TCJA change?

The TCJA introduced a flat 21% corporate tax rate for tax years beginning after December 31, 2017. Corporations with fiscal tax years beginning in 2017 and ending in 2018, however, must calculate their tax by “blending” the rates in effect before 2018 with the rate in effect after 2017.

For example:

Let’s say a nonprofit corporation has a taxable year beginning on July 1, 2017 and ending June 30, 2018 and its unrelated business taxable income for the year is $2,000.

According to the IRS this is how they would calculate their blended rate:

1. UBTI from Pge 1, Part II, line 34 $2,000
2. Tax on line 1 amount using pre-2018 tax rate schedule from Page 19 of 2017 Instructions for Form 990-T (15%) $300
3. Tax on line 1 amount using the 21% rate $420
4. Multiply line 2 by the number of days in the corporation's tax year before January 1, 2018 (184 days) $55,200
5. Multiply line 3 by the number of days in the corporation's tax year after December 31, 017 (181days) $76,020
6. Divide line 4 by the total number of days in the corporation's tax year (365) $151
7. Divide line 5 by the total number of day in the corporation's tax year (365) $208
8. Add lines 6 & 7. This is the corporation's total tax for the 2017 fiscal tax year (blended rate of 18%) $359

When is form 990-T due?

For most tax exempt organizations, form 990-T is due annually by the 15th day of the 5th month after the end of its tax year (May 15th for calendar year organizations and November 15th for June 30, fiscal year organizations). However, organizations may request an automatic six month extension of time to file by using Form 8868, Application for Extension of Time to File an Exempt Organization Return.

Questions? Contact us.

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