United States

IRS issues FAQs on NOL carrybacks for exempt organizations

TAX ALERT  | 

On June 8, 2020, the IRS released FAQs providing guidance to exempt organizations seeking to carryback net operating losses generated in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021 for up to five years.

Background

For tax years beginning on or before Dec. 31, 2017, an exempt organization computed its unrelated business taxable income (UBTI) in the aggregate across all unrelated trades or businesses. For tax years beginning after Dec. 31, 2017, section 512(a)(6) requires an exempt organization with more than one unrelated trade or business to compute UBTI separately with respect to each trade or business, effectively limiting each loss to the unrelated trade or business that generated it.

The recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) permits net operating losses (NOLs) arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to be carried back to the five taxable years preceding the loss year. Exempt organizations could carry these NOLs back to years before the enactment of section 512(a)(6).

Guidance

As discussed in an earlier RSM Tax Alert, recently issued proposed regulations did not address the CARES Act NOL carryback rules with respect to section 512(a)(6). The IRS FAQs released on June 8, 2020 specifically address and clarify the interaction between NOL carrybacks and section 512(a)(6).

  • The CARES Act did not change the method for computing NOLs. In other words, an exempt organization with more than one unrelated trade or business must continue to calculate its NOL separately with respect to each unrelated trade or business. 
  • If an exempt organization carries back an NOL from a tax year beginning in 2018, 2019 or 2020 to a taxable year beginning before Jan. 1, 2018, that NOL can be deducted against the aggregate (non-siloed) UBTI for the year.
  • Any NOLs that remain after being carried back must be siloed for future use.

We expect the IRS to continue to provide additional guidance and update the FAQs with respect to currently open issues. For example, in the event that a taxpayer has NOLs in excess of the amount it is able to carryback, it is unclear how it should apply the carryback to each silo (i.e. pro-rata, taxpayer election, equally from each silo, etc.).

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