Form 990-T Redesigned for 2020
April 13, 2021
By Cindy Feder, CPA
Even though an organization is recognized as tax-exempt, it still may be liable for tax on unrelated business taxable income (UBTI). UBTI is income from a trade or business, regularly carried on, that is not substantially related to the organization’s charitable purpose. A tax-exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T by the fifteenth day of the fifth month after the end of its tax year, or file for a six-month extension. For the 2020 year, the Form 990T has been completely redesigned with many of the changes relating to the new regulations under the Tax Cuts and Jobs Act of 2017. The updated format, as well as other changes that relate to the filing of Form 990-T, should be considered as the filing deadline approaches.
Update on mandatory electronic filing of Form 990-T released by the IRS on March 15, 2021.
Under the Taxpayer First Act, which was enacted into law on July 1, 2019, certain exempt organizations were required to file information and tax returns electronically for tax years beginning after July 1, 2019. At that time, the IRS system was not able to accept e-filing of Form 990-T, Exempt Organization Business Income Tax Return. Pending the conversion of Form 990-T to electronic format, the IRS continued to accept the 2019 tax-year versions of this return on paper.
Now that the IRS has updated its systems to enable e-filing of this form, the 2020 Form 990-T and its instructions have been updated to reflect the mandatory e-filing requirement. Forms 990-T with due dates on or after April 15, 2021 are required to be e-filed. As of the beginning of March 2021, several providers have made software available to file Form 990-T electronically. Information about software providers supporting electronic filing of Form 990-T can be found on the IRS’s Exempt Organizations Modernized e-File (MeF) Providers page.
Any 2020 Form 990-T with a due date on or after April 15, 2021, must be filed electronically and not on paper. (A limited exception applies for 2020 Form 990-T returns submitted on paper that bore a postmark date of on or before March 15, 2021.)
The Form 990-T has been redesigned for the 2020 tax year. The form now includes a separate “Schedule A” for each unrelated trade or business, and lists the number of Schedules A that are attached to the return on “Line J” on Page 1 of the updated form. Each separate trade or business is classified by a two-digit North American Industry Classification System (NAICS) Code.
Under IRC Sec. 512(a)(6), an exempt organization is no longer permitted to aggregate income and deductions from all unrelated trades or businesses when calculating UBTI. UBTI, including for purposes of determining any net operating loss (NOL) deduction, must be computed separately with respect to each trade or business. For purposes of IRC Sec. 512(a)(6)(B), UBTI with respect to any such trade or business cannot be less than zero in a taxable year. Net operating losses for each activity should be carried forward and tracked separately to offset any future income of the specific trade or business that generated the loss. For 2018 and 2019 one activity was reported on page 1 of the Form 990-T and the other activities on Schedule M. The updated format lists the total of all UBTI on Page 1 of the Form 990-T, with each Schedule A showing the details for each separate unrelated trade or business. The new format was implemented to make the Form 990-T much more user-friendly and easy to follow.
Temporary allowance of 100% for business meals.
An organization is allowed a 100% deduction for certain business meal expenses paid or incurred in 2021 and 2022. Generally, an organization can deduct only 50% of the amount otherwise allowable for non-entertainment related meal expenses paid or incurred in an unrelated trade or business. The Taxpayer Certainty and Disaster Relief Act of 2020 amended IRC Sec. 274(n)(2) to provide an exception from the general rule. For business meal expenses paid or incurred after December 31, 2020 and before January 1, 2023, the organization is allowed a deduction of 100% of business meal expenses for food and beverages provided by a restaurant. Meals that are not separately broken out from entertainment expense are not deductible. For the meals to qualify for the 100% deductibility,
- Meals cannot be lavish or extravagant; and
- An employee of the organization must be present at the meal.
Impact of new payroll credits on Form 990-T.
- New payroll credit for required paid sick leave or family leave: An eligible employer can take a credit against payroll taxes owed for amounts paid for qualified sick leave or family leave if it was incurred during the allowed period under the Families First Coronavirus Response Act. The portion of the tax credits that is allocable to an unrelated trade or business must be reported as “other income” on line 12 of the applicable Schedule A and included in gross income in order to ensure that there is no double benefit.
- New employee retention credit (“ERC”): The Coronavirus Aid, Relief, and Economic Securities Act (CARES Act) allows a new employee retention credit for qualified wages. Any qualified wages for which an eligible employer claims against payroll taxes for the new employee retention credit may not be taken into account for purposes of determining other credits. Accordingly, wages used to take advantage of the ERC would not be available as a deduction on the Form 990-T.
For more information on the ERC, follow our series including IRS Notice 2021-20 Offers ERC Guidance.
Treatment of PPP Loan Forgiveness.
For federal income tax purposes, PPP loan forgiveness is not subject to income tax and eligible expenses paid with PPP loans are deductible even when such payments would result in the forgiveness of a loan under the PPP. If a tax-exempt organization took out a PPP loan to cover eligible expenses of its unrelated trade or business, those deductions can be taken on the Form 990-T. The proceeds from the PPP loans are reported as a contribution, as opposed to income, in the year the loan is forgiven. Therefore, proceeds from the PPP loan would not appear in the form 990-T, but will be reported in the form 990.
For the latest information about developments related to Form 990-T and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form990T.