How to Complete Form 990-T Schedule A

Tax-exempt organizations that generate income from activities outside their primary purpose must report it to the IRS using Form 990-T, the Exempt Organization Business Income Tax Return. When an organization has more than one such activity, it must detail the financial results of each one separately.

Schedule A of Form 990-T is a supplementary form where the organization calculates the net income or loss for each distinct unrelated trade or business. A separate Schedule A must be completed for every unrelated business activity the organization conducts. This ensures the profitability of each venture is determined independently before being combined on the main return.

Identifying Separate Unrelated Trades or Businesses

A requirement for completing Form 990-T is the concept of “siloing,” where each unrelated business activity is treated as a distinct financial unit. Tax law mandates that organizations cannot merge the financial results of different business activities. This means the profits from one venture cannot be used to offset the losses from another.

To enforce this separation, the IRS directs organizations to use the North American Industry Classification System (NAICS) to categorize their business activities. An organization must assign a NAICS code to each unrelated business. The primary method for distinguishing between activities is the first two digits of the NAICS code; if two activities fall under different two-digit codes, they are considered separate businesses.

For example, a university that operates a public golf course and sells logo apparel would identify these as two separate activities. The golf course might fall under the NAICS code for “Amusement, Gambling, and Recreation Industries” (code 71), while the retail store falls under “Retail Trade” (codes 44-45). Because the first two digits differ, the university must prepare a separate Schedule A for each activity.

Information Required for Schedule A

For each business activity, an organization must compile specific financial and descriptive information. This includes:

• A six-digit NAICS code and a brief description of the business.
• All income attributable solely to that activity, including gross receipts or sales figures.
• Any capital gain net income from the sale of assets used exclusively in that business.
• Directly connected expenses, which are costs incurred only for that single unrelated business, such as dedicated employee salaries or the cost of goods sold.
• An allocated portion of indirectly connected expenses, which are shared costs that benefit both the unrelated business and other operations.

Indirectly connected expenses require more analysis. These are costs like rent for a building that houses multiple functions, shared utility bills, or salaries of administrative staff who support the entire organization. These costs must be allocated on a reasonable basis, such as using the square footage occupied by the unrelated business as a percentage of the total building space to allocate rent.

Calculating Net Income or Loss for an Activity

With all income and expense data gathered for a single business activity, the organization can perform the calculation on Schedule A. You will transfer the compiled income figures onto the designated lines in Part I of the schedule.

Next, you will enter the directly connected expenses and the allocated portion of the indirectly connected expenses on their respective lines. Subtracting the total deductions from the total income results in the net income or loss for that specific unrelated trade or business.

A specific rule applies to the treatment of Net Operating Losses (NOLs). If a business activity generates a loss for the year, that loss cannot be used to decrease the taxable income from a different, profitable business activity in the same year. Instead, this NOL is carried forward and can only be used to offset future profits generated by that same business activity, in accordance with the “siloing” rules.

Aggregating Results on Form 990-T

After completing a separate Schedule A for each unrelated business, the final step is to aggregate these individual results onto the main Form 990-T. The net income or loss figure calculated on each Schedule A is transferred to a corresponding line in Part I of the Form 990-T, identified by the same description and NAICS code.

The organization must also list the total number of Schedule A forms attached to the return on the front page of the Form 990-T. Once all the net income and loss figures from every Schedule A have been entered, they are totaled. This sum represents the organization’s total unrelated business taxable income before considering certain other deductions and is the starting point for calculating the final tax liability.