New Requirements for Calculating UBTI for Investment Partnerships

In August 2018, the IRS published Notice 2018-67 to provide interim guidance regarding the calculation of unrelated business taxable income (UBTI) for exempt organizations with more than one unrelated trade or business. The guidance also set out requirements for the aggregation of UBTI from investment partnerships.


The 2017 tax reform reconciliation act, commonly referred to as the Tax Cuts and Jobs Act (TCJA), created IRC Section 512(a)(6). This section requires an exempt organization to compute UBTI separately for each of its trades or businesses for tax years beginning after December 31, 2017.

With this change, a loss in one trade or business is no longer available to offset income in another trade or business. Investment partnerships must be considered in addition to all other sources of UBTI, including activities performed directly by the exempt organization.

IRS Notice 2018-67

Until the publication of expected regulations, Notice 2018-67 allows an exempt organization to treat the following as one trade or business:

  • UBTI from a single partnership that contains multiple trades or businesses as long as the directly-held partnership interest meets the requirements of the de minimis or control test and was held as of August 21, 2018. For example, the exempt organization holds a partnership interest that generates UBTI from a farming operation plus UBTI from a rental unrelated to the farming operation.
  • UBTI from all partnerships meeting the de minimis or control test.

De Minimis Test and Control Test

A partnership interest meets the requirements of the de minimis or control test in the following ways:

  • De minimis test—if an exempt organization holds no more than 2% of the profits interest and no more than 2% of the capital interest
  • Control test—if an exempt organization holds no more than 20% of the capital interest and doesn’t have control or influence over the partnership

The percentage is calculated using the beginning and ending percentages reported on the Schedule K-1 for the partnership’s taxable year. In the case of a partnership interest held for less than a year, the percentage interest held at the beginning and end of the period of ownership within the partnership’s taxable year is used.

When determining an exempt organization’s percentage partnership interest for either test, the interest of a disqualified person, a supporting organization, or a controlled entity in the same partnership should be taken into account. 


An exempt organization owns 1.5% of the profit interest in a partnership, and a disqualified person owns a 1% profit interest in that partnership. As a result, the exempt organization doesn’t meet the requirements of the de minimis test because its aggregate percentage interest exceeds 2%.

The exempt organization may still be able to aggregate the partnership interest with other qualifying partnership interests if the partnership interest meets the requirements of the control test.

If neither test is met, the partnership activity is considered a separate trade or business and isn’t eligible for aggregation with other partnerships.

Disqualified Persons

A disqualified person for this test is any person holding certain powers, responsibilities, or interests who is in a position to exercise substantial influence over the affairs of the exempt organization at any time during the past five years.

Examples of disqualified persons include:

  • Voting members of the governing body
  • CEO, CFO, and potentially other employees
  • Organization founder
  • Certain family members and 35%-controlled entities of any of the disqualified persons described above
  • Substantial contributors to the organization, defined as anyone contributing more than $5,000 for the year and required to be reported on Form 990, Schedule B, Schedule of Contributors

Substantial Contributors

The process of obtaining ownership information from substantial contributors and founders for UBTI calculations is similar to requirements for Form 990, Schedule L, Transactions with Interested Persons.

On Form 990, an organization must disclose excess benefits, loans, grants, other assistance, and business transactions with substantial contributors and other interested persons. However, only a reasonable effort is required to obtain the necessary information because it’s not always possible for an organization to absolutely verify all details.


An example from the instructions for Schedule L explains that as long as an organization inquires whether or not a substantial contributor’s desired grant beneficiaries are interested persons and provides pertinent instructions and definitions, and the contributor replies in writing that they aren’t, then the organization has made a reasonable effort.

This designation is achieved regardless of whether or not the beneficiaries actually are interested persons.

Making a Reasonable Effort

The foundation of reasonable effort—whether for purposes of Schedule L reporting or UBTI calculations—often consists of two actions:

  • Annual distribution of questionnaires to affected people, including substantial contributors and founders
  • Adherence to an appropriate conflict-of-interest policy

Assessing the personal investments of disqualified persons can be uncomfortable and time-consuming—especially with substantial contributors who are often external to the organization and may not be expecting questions regarding their ownership of investments.

This makes it even more important to identify a reasonable-effort approach as early as possible.

We’re Here to Help

To learn more about UBTI calculations and how this guidance will affect your exempt organization, contact your Moss Adams professional.

Contact Us with Questions

Enter security code:
 Security code