The IRS reminds Form 990-T Corporate Filers of new tax law provisions that could affect the tax rate applicable to their UBTI. Specifically, fiscal 2017 corporate filers should apply a blended rate to their UBTI for the entire 2017 taxable year, including any UBTI from amounts paid or incurred after December 31, 2017 that increase UBTI under new Section 512(a)(7).

The Tax Cuts and Jobs Act (TCJA) introduced a flat 21 percent corporate tax rate for tax years beginning after December 31, 2017. However, corporations with fiscal tax years beginning in 2017 and ending in 2018 calculate their tax by blending the rates in effect before 2018 with the rate in effect after 2017. An exempt organization that’s a corporation with a 2017 fiscal year calculates its tax liability by applying the pre-2018 rate and the post-2017 rate to the corporation’s taxable income for the entire tax year. It prorates those amounts based on the number of days in each period relative to the total days in the tax year. The sum of those results yields a blended rate. The blended rate may be greater or less than the corporate tax rate of 21 percent.

The TCJA also added Internal Revenue Code Section 512(a)(7), which increases an exempt organization’s UBTI by any amount paid or incurred after December 31, 2017, for any qualified transportation fringe, any parking facility used in connection with qualified parking, or any on-premises athletic facility for which a deduction is not allowable because of Section 274. Organizations with a fiscal tax year beginning in 2017 should enter any such increase in UBTI on line 12 of the 2017 Form 990-T.

In the example below, a corporation – not a controlled group member – filing a Form 990-T for its tax year beginning July 1, 2017, and ending June 30, 2018, is reporting UBTI of $2,000 on line 34 made up in part of UBTI from a disallowed qualified transportation fringe amount reported on line 12. The corporation calculates income tax on line 35c of 2017 Form 990-T as follows:

1.    UBTI from Page 1, Part II, line 34 $2,000
2.    Tax on line 1 amount using pre-2018 tax rate schedule from Page 19 of 2017 Instructions for Form 990‑T (15%) $300
3.    Tax on line 1 amount using the 21% rate $420
4.    Multiply line 2 by the number of days in the corporation’s tax year before Jan. 1, 2018 (184) $55,200
5.    Multiply line 3 by the number of days in the corporation’s tax year after Dec. 31, 2017 (181) $76,020
6.    Divide line 4 by the total number of days in the corporation’s tax year (365) $151
7.    Divide line 5 by the total number of days in the corporation’s tax year (365) $208
8.    Add lines 6 and 7.
This is the corporation’s total tax for the 2017 fiscal tax year (blended rate of 18%).
$359

Resources:

IRS.gov/Form990T

Notice 2018-38

2017 Instructions for Form 990-T

Notice 2018-67

Notice 2018-99

Notice 2018‑100

2018 Instructions for Form 990-T