1. a demand loan where interest is payable on the loan at a rate less than the applicable federal rate [IRC Sec. 7872(e)(1)(A)], or

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1 990 2/ Example 15B-1 Related party interest. Forney First, Inc. (FFI), an accrual basis organization exempt under IRC Sec. 501(c)(3), provides food and shelter to needy families in Forney. FFI augments its charitable contributions by selling imported merchandise (an unrelated business activity) in its thrift store. To expand these activities, FFI borrows $500,000 for one year at 6% interest from ABC Pawnshop, Inc. (ABC), a wholly owned taxable subsidiary. ABC uses the cash method of accounting. On December 31, there is accrued interest of $22,500 on the loan. FFI cannot deduct any of this interest until it repays the loan in the following year and the interest income is reported by ABC. Note: This general rule does not apply to defer the deduction of otherwise deductible OID or below-market loan interest [Temp. Reg (a)-2T(b), Q&A-2]. Interest Paid to a Partnership. A corporate organization that pays interest to a partnership in which it is a partner, directly or indirectly, may not be able to deduct such interest under certain circumstances [IRC Sec. 163(j)]. Other Rules An organization can deduct foregone interest on a below-market loan that it is deemed to have paid to the lender (IRC Sec. 7872). A below-market loan is 1. a demand loan where interest is payable on the loan at a rate less than the applicable federal rate [IRC Sec. 7872(e)(1)(A)], or 2. a term loan where the amount loaned exceeds the present value of all payments due under the loan [IRC Sec. 7872(e)(1)(B)]. These rules are inapplicable to loans of $10,000 or less [IRC Secs. 7872(c)(2) and (c)(3)], to amounts treated as unstated interest [IRC Sec. 7872(f)(8)], and to certain other loans to qualified continuing care facilities [IRC Sec. 7872(g)]. KEY ISSUE 15C Charitable Contributions. General Rules When calculating unrelated business taxable income (UBTI), organizations are allowed to deduct charitable contributions, regardless of whether the contributions are directly connected with carrying on an unrelated trade or business [IRC Sec. 512(b)(10)]. The term charitable contribution has the same meaning here as it does in the case of for-profit entities [IRC Secs. 512(b)(10) and 170(c)]. For example, a Section 501(c)(3) organization may claim a deduction for a contribution to another charitable organization, but not for payments made in conducting its own charitable programs or for scholarships and similar awards made to individuals [Reg (b)-1(g)(3)]. Although an interfund transfer on an organization s books may qualify as a charitable contribution under state law, such transfer is not equivalent to payment to an outside charity under federal law. (See Women of the Motion Picture Industry.) Deduction Limit A corporate organization s deduction for otherwise allowable charitable contributions is generally limited to 10% of its UBTI, computed without regard to the charitable contribution itself [IRC Sec. 512(b)(10)], any domestic production activities deduction under IRC Sec. 199, any net operating loss carryback under IRC Sec. 172 to the tax year, or any capital loss carryback under IRC Sec. 1212(a)(1) to the tax year. Charitable contributions that exceed the 10% limit may be carried over and deducted against UBTI in the succeeding five tax years (to the extent contributions made in those years, plus carryover contributions from earlier years, do not already exceed the 10% limit for that year) [IRC Sec. 170(d)(2)]. Note: A contribution carryover cannot increase a net operating loss (NOL) carryover (Key Issue 15E). Law Change Alert: The Disaster Tax Relief and Airport and Airway Extension Act of 2017 (The Disaster Act) and The Bipartisan Budget Act of 2018 provide relief to the victims of Hurricanes Harvey, Irma, or Maria, and the Key Issue 15C

2 /18 California wildfires. Both acts temporarily suspend the majority of limitations on charitable contributions [IRC Sec. 170(b)]. This relief applies to qualified contributions associated with qualified disaster relief. Qualified contributions are cash contributions made to IRC Sec. 170(b)(1)(A) charities from August 23, 2017, through December 31, 2017, for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas, and October 8, 2017, through December 31, 2018, in the California wildfire disaster area. Donations must be substantiated with a contemporaneous written acknowledgement that the contribution was, or will be, used for relief efforts. The deduction cannot exceed the taxpayer s taxable income over the amount of other charitable contributions allowed. Tax-exempt trusts are allowed a higher deduction limit (either 30% or 50% of UBTI, calculated without the charitable contribution deduction) [IRC Secs. 512(b)(11), and 170(b)(1)(A) and (B)]. In addition, a tax-exempt trust may claim a charitable contribution deduction not only for contributions made to unrelated charitable entities but also for distributions made to charitable beneficiaries of the trust [IRC Sec. 512(b)(11)]. Preparation Pointer: As a result of IRC Sec. 512(b)(11), an exempt trust s charitable beneficiary distributions lose their character as 100% deductible distributions under IRC Sec. 642(c) and become a contribution [which is subject to the 50% or 30% of UBTI limitation in IRC Sec. 170(b)(1)(A) and (B); see also Reg (a)-1(a)]. Example 15C-1 Contributions deductible in determining UBTI. Peace for All, Inc. (PFA), a Section 501(c)(3) organization, operates a soup kitchen for homeless individuals. Substantially all of the food served is donated to PFA by local restaurants and grocery stores. During the year, PFA also spent $100,000 of its own funds in operating the facility. PFA occasionally receives more perishable food than it can use. To avoid wasting this excess food, PFA donates it to TSP (another public charity that operates a similar type of soup kitchen). PFA donated $6,000 of food to TSP during the year (based on the fair market value of the food at the time PFA made the donations, which in all cases was less than PFA s basis in the donated items). PFA also operates an unrelated business. Prior to any deduction for charitable contributions, PFA s UBTI from this activity is $20,000. PFA has a total of $6,000 in charitable contributions for the year. None of the $100,000 PFA spent on its own charitable activities is deductible. In determining its UBTI, PFA can deduct the lesser of its charitable contributions ($6,000) or 10% of its UBTI before any contributions deduction. Thus, its deduction for charitable contributions is $2,000 ($20,000 10%). PFA has $4,000 ($6,000 $2,000) of contributions that carry over to the next five tax years, subject to the normal 10% limitation in each of those years. Planning Tip: Since a public charity is not allowed a charitable contribution for funds it expends in its own activities (see Women of the Motion Picture Industry), the tax law indirectly encourages an entity to donate to other charities rather than to use its resources to further its own exempt purposes. For example, suppose PFA s UBTI (before deducting any charitable contributions) was $200,000, and its contribution deduction limit was $20,000 (10% of $200,000). PFA could lower its liability for unrelated business tax by reducing the amount it spends on its own soup kitchen to $86,000 (from $100,000) and donating the $14,000 difference to TSP. This would increase its total charitable contributions when calculating UBTI to $20,000 [and decrease its unrelated business tax by $5,460 ($14,000 39%)]. Thus, PFA could still spend $106,000 on soup kitchen operations ($86,000 through its own operations and $20,000 through those of TSP) and have an additional $5,460 (the tax savings) to spend on other exempt activities. Accrual-basis Corporations Tax-exempt corporate organizations using the accrual basis of accounting can make retroactive charitable contributions. In determining its UBTI, such an organization may deduct a charitable contribution made after year-end if the following conditions are satisfied [IRC Sec. 170(a)(2); Reg A-11(b)(2)]: 1. The entity s board of directors authorized the contribution prior to the end of the tax year that the deduction is taken. 2. The contribution is actually made on or before the 15th day of the fourth month following the end of the tax year for which the deduction is claimed. 3. The organization elects to treat the contribution as paid during the year for which Form 990-T is filed (i.e., the election can be made on the 2017 return for contributions paid in 2018). Key Issue 15C

3 990 2/ instructions do not specifically require that Schedule O (Form 1120) be attached to Form 990-T, they do state that each member of a controlled group must attach a copy of its consent to the adoption or amendment of an apportionment plan. Caution: The instructions for Schedule O (Form 1120) state that a corporation must file Schedule O with its income tax return, amended return, or claim for refund for each tax year that the corporation is a component member of a controlled group, even if (1) no apportionment plan is in effect or (2) the amounts apportioned have not changed from the previous year. Deferred Tax Liability An organization may owe deferred tax pursuant to IRC Sec. 1291(c)(1) because of an excess distribution from a passive foreign investment company that is taxable as unrelated business income. The portion of the deferred tax amount that is the aggregate increase in taxes [calculated in accordance with IRC Sec. 1291(c)(2)] must be included in the amount entered on line 35c of Form 990-T (for corporations) or on line 36 (for trusts). Write Sec and the amount of such tax to the left of the applicable line. Caution: The portion of the deferred tax that is the aggregate amount of interest calculated under IRC Sec. 1291(c)(3) is not included on line 35c or line 36. Instead, the amount should be written in the bottom right margin of page 2 of Form 990-T with the notation Sec interest. Paying Tax Due Normally, an organization will pay most or all of its tax liability for a year by estimated tax payments throughout that year. (See Key Issue 16F.) However, any balance due shown on line 48 of Form 990-T when the return is prepared must be paid in full by the date the return is filed, but no later than the 15th day of the fifth month after the end of the tax year. Organizations must use electronic funds transfer to make all federal deposits (such as deposits of estimated tax, employment tax, and excise tax) (see Key Issue 16G). Generally, electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS). Note that EFTPS payments must be scheduled by 8 pm EasternTimeonthedaybefore the due date to be timely. Law Change Alert: The Internal Revenue Service announced that victims of Hurricanes Harvey, Irma, and Maria in federally declared disaster areas had until January 31, 2018, to file certain tax returns and make certain tax payments (IR , August 28, 2017; IR , September 12, 2017; IR , September 15, 2017; and IR , September 19, 2017). The relief was available for taxpayers in any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. The tax relief postponed various tax filing and payment deadlines that occurred related to the following hurricanes: Harvey, starting on August 23, Irma, starting on September 4, 2017 (Florida), September 5, 2017 (Puerto Rico and Virgin Islands), and September 7, 2017 (Georgia). Maria, starting on September 17, 2017 (Puerto Rico), and September 16, 2017 (Virgin Islands). As a result, affected businesses had until January 31, 2018, to file returns and pay any taxes that were originally due during this period. Therefore, an organization that was required to pay tax during this period may qualify for the penalty relief. The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late payment penalty notice from the IRS that had a payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated. If EFTPS is not used, arrange for a tax professional, financial institution, payroll service, or other trusted third party to make deposits on the organization s behalf. In addition, a financial institution may initiate same-day wire payment on behalf of the organization. International taxpayers who do not have a U.S. bank account may complete Key Issue 16A

4 /18 an international wire transfer through a foreign bank using the Same-Day Taxpayer Payment Worksheet found at KEY ISSUE 16B Tax Credits Available to Reduce Unrelated Business Income Tax. Background Most tax credits available to for-profit enterprises can reduce the unrelated business income tax (UBIT) liability of a nonprofit organization [IRC Sec. 52(c)]. General Business Credit (GBC) Most of the allowable tax credits are combined into the Section 38 general business credit (GBC). The credits comprising the GBC generally are calculated on their own specific forms and then carried to Form 3800 (General Business Credit). See Table T704 for a list of the various credits, applicable Code sections, and forms. Example 16B-1 Claiming the disabled access credit. Charities, Inc. (Charities), a Section 501(c)(3) tax-exempt organization, uses the calendar year for its accounting period. It operates an unrelated business activity in a building acquired in During 2017, Charities spent $9,000 to remove certain architectural barriers from the building to comply with the Americans With Disabilities Act of The gross receipts from Charities s unrelated business activities in the prior year were $800,000. In 2017, Charities owes tax of $22,250 on its UBTI (before deducting any tax credits), and its tentative minimum tax (TMT) is $16,000. Charities is an eligible small business [defined in IRC Sec. 44(b)] and made eligible access expenditures during the year. Thus, it is entitled to a disabled access credit of $4,375 for the year, calculated on Form 8826 (Disabled Access Credit). (See Illustration 16-1.) The credit is claimed on line 41c, Part IV, of Form 990-T. See PPC s 1040 Deskbook for requirements for claiming the DAC and the rehabilitation credit (RIC). Employee Retention Credit The Disaster Tax Relief and Airport and Airway Extension Act of 2017 (The Disaster Act) and The Bipartisan Budget Act of 2018 provide relief to the victims of Hurricanes Harvey, Irma, or Maria, and the California wildfires. The Disaster Act provides a new employee retention credit for eligible employers. This credit is designed to encourage employers impacted by these disasters to retain and continue paying their employees through the end of The credit equals 40% of up to $6,000 of qualified wages per eligible employee. Thus, the maximum credit per employee is $2,400. This credit is part of the general business credit (GBC). Eligible employers include those that conducted an active business on: August 23, 2017, in the Hurricane Harvey disaster zone and had that business rendered inoperable on any day after August 23, 2017, and before 2018 because of damage from Harvey. September 4, 2017, in the Hurricane Irma disaster zone and had that business rendered inoperable on any day after September 4, 2017, and before 2018 because of damage from Irma. September 16, 2017, in the Hurricane Maria disaster zone and had that business rendered inoperable on any day after September 16, 2017, and before 2018 because of damage from Maria. October 8, 2017, in the California wildfire disaster zone and had that business rendered inoperable on any day after October 8, 2017, and before 2018 because of damage from the wildfires. An eligible employee is one whose principal place of employment on the date of the applicable disaster (August 23, 2017, for Harvey, September 4, 2017, for Irma, September 16, 2017, for Maria, and October 8, 2017, for the California wildfires) with the eligible employer was in the applicable disaster zone. Qualified wages include wages paid to an eligible employee during the period the business is inoperable due to damage sustained by the Key Issue 16B

5 990 2/ applicable disaster, whether or not the employee performs any services. The period of downtime cannot begin any earlier than the date of the applicable disaster and ends on December 31, Carryback and Carryforward Rules for the GBC GBCs have a one-year carryback and a 20-year carryforward [IRC Sec. 39(a)(1) and (2)]. Any unused credits for a year must be carried back to the preceding tax year before being carried forward. There is no election to forgo the carryback period. However, GBCs that arose in tax years beginning before 1998 have a 15-year carryforward period. Unused credits at the end of the 20-year carryforward or at the time the organization terminates its existence may be deducted (not credited) from taxable income. Observation: Unused general business credits that arose in the organization s first tax year beginning in 2010 can be carried back five years rather than one year. However, this increased carryback is only available to an eligible small business [IRC Sec. 39(a)(4)]. Minimum Tax Credit The alternative minimum tax (AMT) paid by a corporate organization (and part or all of the AMT paid by an exempt trust) in one year is allowed as a minimum tax credit (MTC) against the entity s regular tax liability from unrelated business activities in subsequent years (IRC Sec. 53). (See Key Issue 16E for a discussion of the AMT.) The rationale for allowing the AMT paid in one year to reduce the regular tax liability in subsequent years is that, because of the independent nature of the AMT and regular tax systems, double taxation of income or the disallowance of deductions might otherwise result. The MTC that may be used in any year is limited to the excess of the regular tax (after reduction by most credits) over the tentative minimum tax (TMT) for the year [IRC Sec. 53(c)]. Example 16B-2 Benefit of minimum tax credit. United Charities, Inc. (United) operates an unrelated business activity that generates substantial amounts of taxable income. In 2007, United acquired several expensive pieces of machinery it uses in this activity. Because of the accelerated depreciation taken on these assets, United paid AMT in each of the four years prior to 2011 and has an MTC carryforward into 2017 of $18,500. For 2017, United has a $29,000 regular tax liability (unrelated business income tax). United currently qualifies as a small corporation and is exempt from AMT for (See discussion in Key Issue 16E regarding exemption from AMT for small corporations.) United can offset its regular tax liability with its MTC carryforward of $18,500. IRC Sec. 55(e)(5) limits the amount of MTC that can be used by a small corporation to $25,000 plus the amount by which the corporation s regular tax liability exceeds 25% of the excess of the regular tax over $25,000. For example, if the regular tax liability is $29,000, the limit for the MTC is $28,000 {$25,000 + [.75 ($29,000 $25,000)]}. Thus, United can use its entire MTC carryforward of $18,500 to reduce its tax liability to $10,500. Without the MTC, United would not have benefited from the higher AMT depreciation in the current year. The MTC is claimed on Form 8827 (Credit for Prior Year Minimum Tax Corporations). A completed Form 8827 for United is at Illustration The amount from line 8b of Form 8827 should be entered on page 2, line 41d, of United s Form 990-T. Preparation Pointer: Exempt trusts report the use of any MTC they may have on Form 8801 (Credit For Prior Year Minimum Tax Individuals, Estates, and Trusts). The amount of the credit is reported on line 41d of Form 990-T. Using Tax Credits GBCs are used on a first-in, first-out basis. Therefore, an organization needs to identify the earliest generated credits carried forward to the current year, then any GBCs generated in the current year, then any GBCs carried back to the year (in the case of an amended return). If the organization s credits exceed its tax liability, the credits must be used in the order specified in the instructions to Form 3800 (General Business Credit). Key Issue 16B

6 /18 Certain credits are determined based on expenses that would otherwise be allowable as deductions from UBI. For thefollowingcredits,theotherwiseallowableexpensedeductionmustbereducedbytheamountofthecredit: Disabled access. Employer credit for social security and Medicare taxes paid on certain employee tips. Employer-provided childcare facilities and services. Orphan drug. Small employer pension plan start-up costs. Mine rescue team training. Agricultural chemicals security. Employer differential wage payments. Practice Tip: Many exempt organizations invest in publicly traded partnerships that incur foreign taxes on investment activities. These foreign tax payments flow through to the exempt organization partners. Such payments can reduce UBIT even though incurred in activities that are not subject to UBIT (IRC Sec. 515). Similarly, an organization with foreign operations that result in the payment of foreign (or U.S. territory) income taxes can claim a foreign tax credit for such taxes. Preparation Pointer: A detailed discussion of the various credits is beyond the scope of this publication. See Table T704 for a list of other potential credits as well as the IRC section and IRS form number. Refer to the IRC sections and form instructions for additional guidance. Law Change Alert: The Bipartisan Budget Act of 2018 retroactively reinstated the extender provisions from January 1, 2017, to December 31, These provisions, which had previously expired at the end of 2016, are included on Table T704. Filing Form 990-T Only to Claim the Health Insurance Tax Credit Tax-exempt organizations that are qualified small business employers (discussed in Resource R507) and are filing Form 990-T only to claim the health insurance tax credit may follow these specific instructions for completing Form 990-T: 1. Complete the heading of Form 990-T except for items E, H, and I. 2. Enter -0- on line 13, column (A), line 34, and line Enter the credit from line 20 of Form 8941 on line 45f. 4. Complete lines 46, 49, 50 and the signature area. 5. Write Request for 45R Credit Only on the top of Form 990-T. 6. Attach a completed Form 8941 to the return. Practice Tip: Many eligible exempt organizations, especially religious organizations, have failed to claim the health insurance tax credit because they normally do not file Form 990-T. (For further details, see Resource R507 and the instructions to Form 8941.) Therefore, assisting such organizations in claiming this refundable credit is a potentially significant practice development opportunity. KEY ISSUE 16C Proxy Tax on Lobbying Expenditures. Section 501(c)(4), (c)(5), and (c)(6) organizations engaging in lobbying activities generally either must [IRC Sec. 6033(e); Regs , and ] 1. tell their members how much of the dues and other payments made by the members are allocable to lobbying activities (and therefore nondeductible), or Key Issue 16C

7 990 2/18 T-59 TABLE T704 Tax Credits That Reduce Unrelated Business Income Tax (See Key Issue 16B) Credit Code Sec. Form Carbon Dioxide Sequestration 45Q 8933 Clinical Testing Expenses for Certain Drugs for Rare Diseases or Conditions (i.e., 45C 8820 Orphan Drug Credit) Contributions to Selected Community Development Corporations Disabled Access Distilled Spirits Employee Retention Credit A Employer Differential Wage Payments (credit for employees who are active duty 45P(a) 8932 members of the uniformed services) Employer-provided Child Care Facilities and Services 45F 8882 Employer Social Security and Medicare Taxes Paid On Certain Employee Tips 45B 8846 Empowerment Zone Employment Foreign Tax corporations 27(a) 1118 Foreign Tax trusts 27(a) 1116 Gasoline and Special Fuels 34(a) 4136 Holders of Tax Credit Bonds 54A and Investment Credit (rehabilitation credit, energy credit, qualifying advanced coal 47, 48, 48A, 3468 project credit, qualifying gasification project credit, and qualifyingadvancedenergy project credit) and 48B Low-income Housing Low Sulphur Diesel Fuel 45H 8896 New Markets 45D 8874 Prior Year Minimum Tax Puerto Rico Economic Development 30A 5735 Small Employer Health Insurance Premiums 45R 8941 Small Employer Pension Startup Costs 45E 8881 Work Opportunity 51(a) 5884/8850 Table T704

8 T /18 The Bipartisan Budget Act of 2018 retroactively reinstated the extender provisions from January 1, 2017, to December 31, These provisions, that had previously expired at the end of 2016, include the following: Credit Code Sec. Form a Biofuel Fuel Producer 40(b)(6) 6478 Alternative Fuel Vehicle Refueling Property 30C 8911 Alternative Motor Vehicle 30B 8910 Biodiesel and Renewable Diesel Fuels 40A 8864 Energy Efficient Home 45L 8908 Indian Employment 45A 8845 Mine Rescue Team Training 45N 8923 Qualified Plug-in Electric Drive Motor Vehicle 30D 8936 Qualified Railroad Track Maintenance 45G 8900 Renewable Electricity and Refined Coal and Indian Coal Production (i.e., electricity produced from certain renewable resources) Notes: a Form listed is the form used to report the credit before expiration of the extender in Presumably, the form required to report the credit for 2017 will be the same as the form used in Table T704 (Continued)