Form 990-T Redesign for 2020

In September, the IRS surprised much of the tax exempt community with the release of a radical redesign of Form 990-T, Exempt Organization Business Income Tax Return for tax year 2020. The overhaul of the Form 990-T (the third update in as many years) is an attempt to consolidate the previous patchwork of adjustments made to capture unrelated business income tax under new regulations associated with the Tax Cuts and Jobs Act of 2017. 

However, without the benefit of draft instructions to go with the new form, most of the industry was left to speculate about any fundamental changes in the way taxable income would be reported. On December 2nd, the IRS released the draft instructions to accompany the new form. With this new insight, we are able to understand how the return works and what filers will need to know.

Two Distinct Disclosures:

The updated form splits the reporting into two distinct and required disclosures: 

• The base Form 990-T, and 
• The new Schedule A 

Form 990-T will now act as a snapshot summary of all taxable activities maintained by the filing organization’s total unrelated business taxable income. This disclosure is designed to consolidate the separate “silos” of taxable activity in an easily digestible manner in a centralized location on the return. While this seems like a useful and obvious function, it was a glaring omission in both the 2018 and 2019 Form 990-T that led to cumbersome methods of consolidating revenue streams with little official guidance from the IRS.

Key Facts About New Schedule A: 

Now that the core of the Form 990-T has been repurposed as a summary document:

• The actual detail of calculating taxable income has shifted to the new Schedule A, “Unrelated Business Taxable Income From an Unrelated Trade or Business”. 
• This new schedule replaces the previous Schedule M and is meant to be prepared for each separate unrelated business activity.
• Schedule A retains much of the format of Form 990-T from previous years.
  • It presents a basic taxable income calculation along with discreet calculations for the most common mechanisms for generating taxable income. 

Parallel with the release of the draft instructions, the IRS has finalized its guidance to define a distinct line of business to ensure filers know how many silos of revenue should be reported (and thus, how many copies of Schedule A should be included in the filing). 

• Under the final regulations, which are similar to the earlier proposed regulations, the IRS has confirmed its stance that a line of business should be determined using the first two digits of the North American Industry Classification System (NAICS) Codes. 
  • NAICS is an industry classification system that typically uses a six digit code to differentiate similar industries to collect statistical data related to the economy, with each digit in the code providing a slightly more nuanced grouping of an activity. 
  • By truncating the six digit code to two digits, the IRS will broadly recognize 20 separate business activities requiring a separate Schedule A.

Positive Outlook:

While these changes seem drastic at first glance, it seems the ultimate goal is to neatly capture the requisite information in a way mirroring the requirements set forth in the Tax Cuts and Jobs Act of 2017. 

A potential benefit of reporting the taxable activity in a consistent and systemized way across the industry is that it generates an electronically transmittable return for the first time since its inception. Regulatory reasons aside, the electronic filing of the Form 990-T has been on the industry wishlist for quite some time due to both convenience and the immediate comfort of knowing a return is filed shortly after transmittal. 

Depending on an organization’s filing requirements, the changes to the Form 990 could be described as comprehensive, necessary, and even overdue. Questions will arise in advance of, and throughout the tax preparation process, so we encourage you to contact us regarding any questions about the updated form and the impact it may have on your organization.