The IRS has recently granted an extension for certain applicable entities to make an elective payment election on Form 990-T, providing significant relief for tax-exempt organizations. This extension allows organizations more time to manage their tax obligations related to Unrelated Business Income Tax (UBIT) and avoid penalties. In this blog post, we’ll discuss the purpose of Form 990-T, the reasons behind the IRS extension, and who qualifies for the relief. We will also outline the key steps these organizations need to follow to file their elective payment election and highlight important deadlines and IRS updates.

What Is Form 990-T?

Form 990-T, titled “Exempt Organization Business Income Tax Return,” is the form that tax-exempt organizations use to report income derived from business activities unrelated to their primary tax-exempt purpose. The tax on this income is called Unrelated Business Income Tax (UBIT).

Even though organizations like charities, religious institutions, and educational entities are generally exempt from federal income taxes, they must pay UBIT on income generated through activities that do not directly support their tax-exempt mission. For example, if a non-profit rents out its facilities, runs a retail store, or engages in commercial ventures that are not related to its core purpose, the income from these activities is taxable and must be reported on Form 990-T.

Background on the Elective Payment Election

The elective payment election allows tax-exempt organizations to make advance payments toward their UBIT liability. This is beneficial for organizations because it gives them the flexibility to estimate their tax liabilities and submit payments before the official filing deadline. This can help avoid penalties and interest for underpayment and ensure organizations stay compliant with IRS regulations.

The election is important for organizations that engage in multiple unrelated business activities, as they can aggregate income across different sources and make more accurate payments. This elective payment can be made when organizations file Form 990-T.

Why Did the IRS Grant the Extension?

The IRS often grants extensions to give taxpayers and entities more time to comply with complex tax regulations. The current extension on the elective payment election for Form 990-T provides relief in the wake of recent regulatory changes, delays in the tax filing process, and other logistical challenges organizations face. This relief is also extended due to recent natural disasters that have impacted organizations’ ability to meet deadlines, such as the Watch Fire in Arizona, which has caused multiple deadlines to be postponed until February 3, 2025, for affected entities .

The IRS recognizes that many tax-exempt organizations have limited resources to handle complicated tax filings. Extending deadlines offers them additional time to ensure they are in full compliance with federal tax law without facing penalties or additional interest on their tax liabilities.

Who Qualifies for the Relief?

This extension is targeted at tax-exempt organizations that are required to file Form 990-T to report UBIT and make elective payments on those taxes. The types of organizations that qualify include:

1. Charitable Organizations – Non-profits that engage in unrelated business activities, such as running a gift shop or renting out space, may qualify for the extension.
2. Religious Institutions – Churches and other religious entities that generate income through unrelated activities like leasing property are also impacted.
3. Educational Institutions – Colleges and universities that earn income from activities unrelated to their educational mission, such as hosting conferences or operating bookstores.
4. Pension Plans and Retirement Accounts – Certain pension funds and retirement plans are required to file Form 990-T if they earn UBIT, and they are eligible for the extension.
5. Social Welfare Organizations – Entities organized under IRS Code Section 501(c)(4) that engage in commercial activities not directly related to their social mission.

Updated Deadlines for Filing the Elective Payment Election

The most important aspect of this IRS relief is the updated deadline. As a result of recent disasters and other logistical challenges, the deadline for making an elective payment election on Form 990-T has been extended. For many organizations affected by disasters, such as the Watch Fire in Arizona, the IRS has extended deadlines until February 3, 2025.

For organizations not impacted by the disaster, the deadlines vary. It’s essential for tax-exempt organizations to regularly check the IRS website for the most current deadlines and updates to ensure compliance.

Steps to File the Elective Payment Election

To take advantage of the elective payment process, organizations need to follow a series of steps:

1. Determine UBIT Liability – Start by calculating how much income the organization has generated from unrelated business activities. These calculations should be accurate and comprehensive, as underpayment could result in penalties.
2. File Form 990-T – Organizations should prepare and file Form 990-T, ensuring that all unrelated business income is reported.
3. Make Elective Payments – When filing Form 990-T, organizations can elect to make advance payments toward their estimated UBIT liability. This elective payment can help minimize the risk of underpayment penalties later.
4. Meet the Extended Deadline – Organizations should take note of the extended deadlines and submit both their Form 990-T and elective payments by the new date provided by the IRS. For those affected by disasters, this may be extended to February 3, 2025.
5. Consult IRS Guidance – Organizations should check the latest IRS guidance on Form 990-T filing and elective payments, especially if they have any questions about eligibility or specific filing requirements.

Benefits of the Extension

The extension provided by the IRS offers several benefits to tax-exempt organizations:

• Additional Time to Prepare – Many organizations face logistical challenges in gathering the necessary financial information to file Form 990-T. The extension gives them more time to ensure accuracy in their filings.
• Avoiding Penalties – Organizations that are unable to meet the standard filing deadlines due to unforeseen circumstances can avoid penalties for late filing or underpayment by taking advantage of the extended deadlines.
• Financial Flexibility – By allowing organizations to make elective payments on their UBIT, the IRS helps them manage cash flow better and reduce the financial strain of a large tax bill at the end of the year.

Conclusion

The IRS extension for making an elective payment election on Form 990-T is a welcome relief for tax-exempt organizations that need more time to comply with UBIT filing requirements. Whether impacted by natural disasters or facing other logistical challenges, organizations can use this extra time to accurately calculate their tax liabilities, file the necessary forms, and make advance payments to avoid penalties.

By following the IRS’s updated deadlines and guidance, tax-exempt organizations can stay compliant and ensure they meet their tax obligations without added financial stress. If your organization is required to file Form 990-T, take advantage of this extension and consult the latest IRS updates to make the process as smooth as possible.