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IRS Requires Nonprofits to Silo CARES Act NOL Carrybacks

Posted on June 9, 2020

The IRS is attempting to clarify issues regarding the effect of net operating loss carrybacks on calculating a tax-exempt organization’s unrelated business taxable income.

An FAQ posted by the IRS June 8 addresses questions that have arisen regarding the interplay between section 512(a)(6), established by the Tax Cuts and Jobs Act, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), enacted earlier this year.

Section 512(a)(6) requires an EO with multiple unrelated trades or businesses to calculate UBTI separately (siloing), including for purposes of NOL deductions. Under the CARES Act, any NOL in a tax year starting after December 31, 2017, and before January 1, 2021, may be carried to the five tax years before the tax year of the loss, including tax years before section 512(a)(6) was enacted.

The IRS FAQ explained that when determining UBTI under section 512(a)(6) for tax years starting after December 31, 2017, CARES Act NOLs must be siloed. An EO subject to section 512(a)(6) may deduct CARES Act NOLs against the aggregate UBTI in a tax year beginning before January 1, 2018, when carrying the NOL “back to such taxable year because section 512(a)(6) does not apply to such taxable year,” the IRS added.

The IRS said that an EO may carry back CARES Act NOLs attributable to an unrelated trade or business even if the organization wouldn’t have had a CARES Act NOL if the deduction in the relevant tax year had been calculated on an aggregate basis.

However, an EO may not deduct CARES Act NOLs against aggregate UBTI in tax years that begin after December 31, 2017, if any CARES Act NOLs remain after being carried back to tax years starting before January 1, 2018, the IRS said. The special rule in the TCJA allowing NOLs generated in tax years beginning before January 1, 2018, to be deducted against aggregate UBTI doesn’t apply to CARES Act NOLs because those NOLs arise in tax years beginning after December 31, 2017, the agency explained.

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