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The Evolution of the Form 990-T

By:
Heather Leggiero, CPA, JD
Published Date:
Apr 1, 2022

Over the past several years, Form 990-T, Exempt Organization Business Income Tax Return, has changed from its pre-2018 versions. The Taxpayer Cuts and Jobs Act of 2017 (TCJA) made significant changes to the unrelated business income (UBI) tax law and required years of revisions as guidance was issued by the IRS. Two major UBI TCJA changes were made to the net operating loss (NOL) rules and the introduction of siloing to segregate multiple unrelated trade or business activities.

Net Operating Losses

An NOL is generated when a business activity’s annual expenses exceed its income. This loss can be utilized in other years. Before the TCJA, an NOL could be carried back 2 and forward 20 years. The NOL carryback rules were allowed for the taxpayer to offset the income from a prior year by the NOL, therefore generating an immediate refund of taxes. If there was no income in the previous two years or the taxpayer elected not to carryback the NOL, the NOL was then carried forward to be used in subsequent years (limited to 20 years).

The TCJA revised these rules by eliminating the carryback provisions and the 20-year carryforward limitation. In other words, when an NOL is generated, the taxpayer can only carryforward that loss to be used against future income with no 20-year limitation. The TCJA also limited the use of the NOL to 80% of taxable income. The 2020 pandemic legislation temporarily changed the TCJA NOL rules allowing NOLs generated in 2018-2020 to be carried back 5 years and eliminating the 80% rule.

Siloing Rules

The TCJA also introduced the concept of separately computing UBI where multiple trades or businesses were conducted by the tax-exempt organization. In addition, the NOLs from one unrelated business activity cannot offset the income of another unrelated business activity. The NOL can only be used to offset the income from that specific activity in a future year. A consequence of this change was the aggregation of business activities as one. Further guidance now allows aggregation of business activities that fall under the first 2 digits of the North American Industry Classification System (NAICS). Investments in partnerships and S corporations may also be aggregated if the de minimis or participation test is met (see 990-T instructions for business activity codes).

The Evolving Form 990-T

All these tax law changes required revisions to Form 990-T. It took several years to get guidance from the IRS that included IRS Notices, proposed regulations and final regulations issued in late 2020. There are still some specific questions awaiting further guidance.

2018

The 2018 Form 990-T introduced Schedule M for those filers with more than one trade or business. This allowed the taxpayer to report the income separately for each trade or business. However, if there was only one trade or business, the taxpayer need only report that income on the first page similar to prior years. This version also added lines for post-2017 NOLs and pre-2018 NOLs to properly utilize these losses. The post-2017 NOLs were specific to the business activity that generated it and reported on the Schedule M or page 1 of the activity that generated it. The pre-2018 NOLs follow pre-TCJA rules, can offset aggregated income and reported on page 2.

2019

The only notable change to the 2019 return was moving the charitable contribution deduction from the siloed activity to Part II on page 2, allowing it as a deduction from total unrelated business taxable income.

2020

The 2020 Form 990-T underwent a slew of changes, not only because of tax law changes but because of the IRS mandate to electronically file the form. Prior to 2020, the Form 990-T had to be paper filed with no option to file electronically. The mandatory electronic filing rules only apply to 2020 or later forms filed on or after April 15, 2021. All prior year returns and 2020 returns that were filed before that date had to be paper filed.

The 2020 return replaced the Schedule M with Schedule A. Schedule A is now required to report each unrelated trade or business even if there is only one. Schedule A also allows NAICS reporting for each activity to better disclose when activities are aggregated. Page 1 now reports total unrelated business income and deductions allowed against it, such as charitable contributions and pre-2018 NOLs. This summary was previously reported on page 2. Question 4 was also added to Part IV requesting information about any change in the taxpayer’s method of accounting and a Part V, Supplemental Information section was added to describe the change in Question 4.

2021

It appears that the Form 990-T modifications are still occurring with the additional changes to the 2021 return. Part IV added questions regarding NOLs. Question 4 now asks about pre-2018 NOLs, and Question 5 requires a reconciliation of post-2017 NOLs by business activity; these modifications should give the IRS better information to police the use of the NOLs. The previous Question 4 about changes in methods of accounting is now Question 6.

Conclusion

For those Form 990-T preparers, it has been a long journey over the last several years. Tax preparers should pay close attention to carryovers of net operating losses and NAICS business code reporting when their software rolls the information from year to year, especially from 2019 to 2020. The TCJA changed the way UBI is reported—hence, the multiple versions of Form 990-T since 2017. The mandatory electronic filing requirement is an improvement over paper filing that should provide quicker processing time and receipt of refunds. Wonder what 2022 will bring!

Heather J. Leggiero, CPA, JD, is a partner in The Bonadio Group’s tax division. She was a partner with Dorfman-Robbie, CPAs, before its merger with the Bonadio Group in 2008. Her breadth of knowledge and expertise in the tax issues surrounding tax exempt organizations makes her an integral part of the client service team. Heather received her B.S. in Accounting from the State University of New York at Oswego; her Masters of Accountancy from the University of South Florida; and her J.D. from Albany Law School. She is active in the community as a member of the Howard W. Blake Visual Arts Parent Group and volunteer at the Straz Center. Her professional memberships include the New York State Bar Association and the AICPA American Institute of Certified Public Accountants.

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