The Tax Cuts and Jobs Act of 2017 (TCJA) that was signed into law on December 22, 2017, has some tax implications that impact nonprofit organizations. In this article we specifically address the Net Operating Loss (NOL) rules and how they apply to Unrelated Business Taxable Income (UBTI) for nonprofit organizations that file Form 990-T. These rules are generally effective January 1, 2018.
Under the pre-TCJA tax law, a non-profit could net together its various business activities that produced UBTI in determining the amount subject to income tax. Under the TCJA, nonprofits must calculate UBTI for each unrelated trade or business separately, with the total UBTI equaling the sum of each activity’s UBTI. Any activity that produces a loss cannot be used in reducing the current year total UBTI; instead that specific activity will have an NOL that it can carry forward to offset future UBTI for that specific activity only. The NOL cannot be used to offset UBTI from other unrelated business activities.
Also as part of the TCJA, NOLs generated after 2017 can only be carried forward; they cannot be carried back to offset prior tax. In addition, NOLs generated after 2017 can only be used to the extent of 80% of taxable income computed without regard to the NOL. Thus you may not be able reduce your current UBTI to zero by using a prior year NOL. For example, unrelated business Activity A has a 2018 loss of $10,000. This NOL is carried forward to 2019. In 2019, Activity A has profit before considering the 2018 NOL, of $8,000. The NOL that can be used in 2019 is $6,400 ($8,000 profit before NOL times 80%). Resulting UBTI for Activity A in 2019 is $1,600 and the 2018 NOL that remains is $3,600 ($10,000 less $6,400) which can be carried forward to 2020. Now if we change the facts for 2019 and the profit is $13,000 before NOL usage, 80% equals $10,400; now we can use the entire $10,000 NOL from 2018 to reduce 2019 UBTI to $3,000.
If your organization has a pre-2018 NOL generated from UBTI activities, that NOL can be used to offset total UBTI. It is not required to be allocated to any specific business activity.
One final thought; as part of the TCJA, the corporate tax rate changed from a tier (bracket) tax system (0%, 15%, 25%, 34%, and 39%) to a flat 21%. This could be good news or bad news depending on your organization’s level of UBTI. You can reference IRS Publication 598 regarding Tax on Unrelated Business Income, or you can contact your local Hawkins Ash representative for help.