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Final UBTI segmentation rules provide guidance to exempt organizations

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November 2020


The IRS on November 19 released an advance version of Final Regulations under Section 512(a)(6), which requires an exempt organization with more than one unrelated trade or business to calculate unrelated business taxable income (UBTI) separately with respect to each trade or business.  The Final Regulations generally adopt the rules outlined in the Proposed Regulations issued on April 24, 2020, with some clarifications. The Final Regulations apply to tax years beginning after the date the regulations are published in the Federal Register.

Below is a brief overview of key changes and additions contained in the Final Regulations. PwC will issue more in-depth analyses in the near future.

The takeaway

The Final Regulations generally adopt the Proposed Regulations with limited changes. The Final Regulations, however, address some questions that had been left unanswered by the Proposed Regulations. Of importance to many exempt organizations, the Final Regulations generally do not relax the rules applicable to investment activities. As a result, exempt organizations will need to evaluate the specific trade or businesses of such investments where they own greater than 20% and the look-through rule does not apply.

The Final Regulations adopt from the Proposed Regulations the use of NAICS 2-digit codes, and also provide that more specific codes such as 6-digit codes and NAICS manual trade or business descriptions at that level are relevant to the determination of the 2-digit code. Organizations with multiple unrelated trades or businesses may find it helpful to become familiar with the NAICS codification system in general.

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Rob Friz

Health Services Tax Leader, PwC US

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