New UBTI regs raise partnership reporting issues

Tax Hot Topics newsletter The IRS recently issued proposed regulations (REG-106864-18) concerning the “siloing” rules for unrelated business taxable income (UBTI) that would potentially require additional reporting by partnerships with tax-exempt partners.

The proposed regulations provide guidance on Section 512(a)(6), which was added by the Tax Cuts and Jobs Act (TCJA). Under Section 512(a)(6), tax-exempt organizations subject to the unrelated business income tax must calculate their UBTI separately for each trade or business, including trades or businesses conducted through partnerships. The proposed regulations follow on the heels of prior guidance issued in Notice 2018-67. For details on the proposed regulations and their impact on tax-exempt organizations, please see our story “IRS issues proposed regs on UBTI ‘siloing’ rules.”

Additional partnership-level reporting is likely necessary to accommodate a tax-exempt organization partner’s ability to rely on the newly issued proposed regulations, in their entirety, for tax years beginning before the publication of final regulations. For example, in order to enable tax-exempt partners to determine their partner-level aggregation, a partnership will need to separately report income or loss for each trade or business that it conducts and provide appropriate two-digit North American Industry Classification System code information.

A partnership will also have to break out information for each trade or business conducted by a lower-tier partnership in which it holds an interest. In addition, it must report its percentage interest in the lower-tier partnership’s capital and profits to enable tax-exempt partners to apply the look-through rule for determining whether a tax exempt partner of an upper-tier partnership may treat its indirect interest in the lower-tier partnership as a qualified partnership interest under the de minimis rule, if they so elect.

Because a tax-exempt organization, in determining its percentage interest in a partnership, is permitted to rely on the Schedule K-1 it receives from the partnership, it is important that partnerships report their partners’ percentage interests in the partnership’s capital and profits correctly. For example, merely reporting “variable” for a partner’s interest in partnership profits while reporting specific percentages for the partner’s interest in partnership capital would permit reliance only with respect to the percentage capital interest.

Tax-exempt organizations have options as to how they apply Section 512(a)(6) for tax years beginning before the publication of final regulations. Partnerships with tax-exempt partners should prepare for the additional reporting required to enable these partner-level decisions.

Grace Kim
Principal, Partnerships
Washington National Tax Office 
T +1 202 521 1590

Jose Carrasco
Senior Manager, Partnerships
Washington National Tax Office 
T +1 202 521 1552

Whit Cocanower
Washington National Tax Office
T +1 202 521 1541

Ryan Nodal
Washington National Tax Office
T +1 803 231 3020

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