Background An exempt organization may engage in more than one unrelated trade or business. Previously, an exempt organization deriving gross income from the regular conduct of two or more unrelated trades or businesses calculated unrelated business taxable income (UBTI) by determining its aggregate gross income from all such unrelated trades or businesses and reducing that amount by the aggregate deductions allowed with respect to all such unrelated trades or businesses. Section 512(a)(6), which was added to the Internal Revenue Code by section 13702 of the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054 (2017)) (TCJA), enacted December 22, 2017, changed this calculation for exempt organizations with more than one unrelated trade or business. Section 512(a)(6) requires an organization subject to the unrelated business income tax in section 511, with more than one unrelated trade or business, to calculate unrelated business taxable income (UBTI) separately, including for purposes of calculating any net operating loss (NOL) deduction, with respect to each such trade or business in taxable years beginning after December 31, 2017 (referred to as "siloing"). At the same time, section 13302 of the TCJA made extensive changes to section 172 of the Internal Revenue Code regarding the NOL deduction, including generally repealing NOL carrybacks (except with respect to certain farming losses and to certain insurance companies) while permitting indefinite carryforwards. On March 27, 2020, Congress amended section 172 in section 2303 of the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136 (134 Stat. 281 (2020)) (CARES Act). The CARES Act provides that any net operating loss arising in a taxable year beginning after December 31, 2017, and before January 1, 2021 (CARES Act NOLs), may be carried to the five taxable years preceding the taxable year of such loss, which includes taxable years prior to the enactment of section 512(a)(6). Q1. In determining the UBTI of an exempt organization with more than one unrelated trade or business in a taxable year beginning after December 31, 2017, are CARES Act NOLs required to be siloed so that each unrelated trade or business calculates its NOL separately? A1. Yes. In determining the UBTI in taxable years beginning after December 31, 2017, section 512(a)(6) requires an exempt organization with more than one unrelated trade or business to silo NOLs arising in taxable years beginning after December 31, 2017, so that each trade or business calculates its NOL separately. CARES Act NOLs arise in taxable years beginning after December 31, 2017, and therefore must be siloed. Q2. Can an exempt organization subject to section 512(a)(6), and that has CARES Act NOLs, carry back and deduct those NOLs against the aggregate UBTI in a taxable year beginning before January 1, 2018? A2. Yes. An exempt organization subject to section 512(a)(6) can deduct CARES Act NOLs against the aggregate UBTI in a taxable 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. Also, an exempt organization may carry back CARES Act NOLs attributable to an unrelated trade or business, even if the exempt organization would not have had a CARES Act NOL if the deduction in the relevant taxable year were calculated on an aggregate basis. Q3. Can an exempt organization deduct CARES Act NOLs against aggregate UBTI in taxable years beginning after December 31, 2017, if any CARES Act NOLs remain after being carried back to taxable years beginning before January 1, 2018? A3. No. The special rule in section 13702(b)(2) of the TCJA that allows NOLs arising in taxable years beginning before January 1, 2018, to be deducted against aggregate UBTI does not apply to CARES Act NOLs because those NOLs arise in taxable years beginning after December 31, 2017. Accordingly, when deducting CARES Act NOLs against UBTI in taxable years beginning after December 31, 2017, the CARES Act NOLs must be siloed consistent with section 512(a)(6).
