Part II. Deductions Not Taken — 2025 Inst 990-T (PDF)

If the aggregate sum of the amounts on all Schedules A (Form 990-T), Part I, line 13, column (A), is $10,000 or less, you don’t have to complete Schedule A (Form 990-T), Part II, lines 1 through 14. However, you must complete the remainder of Schedule A (Form 990-T), Part II and include the larger of each total from Schedule A (Form 990-T), Part II, line 18, or zero, in the computation of the amount reported on Part I, line 1, of Form 990-T.

Note: Only expenses directly connected with the unrelated trade or business income reported on the Schedule A (Form 990-T) for that particular unrelated trade or business may be deducted on that Schedule A (Form 990-T) (see Directly connected expenses , later, in Appendix A). Don’t separately include in Schedule A (Form 990-T), Part II, any expenses that are reported in Schedule A (Form 990-T), Parts III through IX, other than

excess exempt expenses entered on Schedule A (Form 990-T), Part II, line 12, and excess readership costs entered on Schedule A (Form 990-T), Part II, line 13. For example, officers’ compensation allocable to advertising income is reported on Schedule A (Form 990-T), Part IX, only and shouldn’t be included on Schedule A (Form 990-T), Part X, or Schedule A (Form 990-T), Part II, line 1.

Limitations on Deductions The following items discuss certain areas in which the deduction may be limited.

Activities Lacking a Profit Motive

In some instances, it is necessary to report income whether or not it comes from a trade or business (including interest, annuities, royalties, and rents from controlled organizations, and income of a section 501(c) (7), (9), or (17) organization other than exempt function income). If income is attributable to an activity lacking a profit motive, then a net loss from the activity can’t be claimed on Form 990-T. Therefore, in Part I, column (B), and Part II, the total of deductions for expenses directly connected with income from an activity lacking a profit motive is limited to the amount of that income. Generally, an activity lacking a profit motive is one that isn’t conducted for the purpose of producing a profit or one that has consistently produced losses when both direct and indirect expenses are taken into account.

Deductions Related to Property Leased to Tax-Exempt Entities

For property leased to a governmental or other tax-exempt entity, or in the case of property acquired after March 12, 2004, that is treated as tax-exempt-use property other than by reason of a lease, the organization may not claim deductions related to the property when they exceed the organization’s income from the lease payments. Amounts disallowed may be carried over to the next year and treated as a deduction concerning the property. See section 470.

Transactions Between Related Taxpayers

Generally, an accrual basis taxpayer may deduct business expenses and interest owed to a related party only in the year the payment is included in the income of the related party. See sections 163(e)(3) and 267 for limitations on deductions for unpaid interest and expenses.

Preference Items

Corporations may be required to adjust deductions for depletion of iron ore and coal, intangible drilling and exploration and development costs, and the amortizable basis of pollution control facilities. See section 291 to determine the amount of the adjustment.

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Section 263A Uniform Capitalization Rules

These rules require organizations to capitalize or include as inventory cost certain costs incurred in connection with the following.

The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business.
Real property or personal property held in inventory (tangible and intangible) acquired for resale.
The production of real property and tangible personal property produced by the organization for use in its trade or business or in an activity engaged in for profit.

Tangible personal property produced by an organization includes a film, sound recording, videotape, book, or similar property.

Indirect expenses. Organizations subject to the section 263A uniform capitalization rules are required to capitalize direct costs and an allocable part of most indirect costs (including taxes) that benefit the assets produced or acquired for resale or are incurred by reason of the performance of production or resale activities.

supplies that aren’t incidental. See Schedule A (Form 990-T), Part III. Cost of Goods Sold, later.

See Regulations sections 1.263A-1 through 1.263A-3.

Travel, Meals, and Entertainment Subject to the limitations and restrictions discussed below, an organization can deduct ordinary and necessary travel, meals, and non-entertainment expenses paid or incurred in its trade or business. Generally, entertainment expenses, membership dues, and facilities used in connection with these activities can’t be deducted. In addition, no deduction is generally allowed for qualified transportation fringe benefits. Special rules apply to deductions for gifts, luxury water travel, and convention expenses. See section 274 and Pub. 463, Travel, Gift, and Car Expenses.

Qualified transportation fringes (QTFs). Generally, no deduction is allowed under section 274(a)(4) for QTFs provided by employers to their employees. QTFs are defined in section 132(f)(1) and include:

For inventory, some of the indirect expenses that must be capitalized are:

Administration expenses;
Taxes;
Depreciation;
Insurance;
Compensation paid to officers attributable to services;
Rework labor; and
Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans.

Travel. The organization can’t deduct travel expenses of any individual accompanying an organization’s officer or employee, including a spouse or dependent of the officer or employee, unless:

That individual is an employee of the organization, and
Their travel is for a bona fide business purpose and would otherwise be deductible by that individual.
Transportation in a commuter highway vehicle between the employee’s residence and place of employment,
Any transit pass, and
Qualified parking.

See section 274, Pub. 15-B, and Pub. 535 for details.

Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must be capitalized and those that may be currently deductible.

Interest expense. Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. See Regulations section 1.263A-8 through 1.263A-15.

When are section 263A capitalized costs deductible? The costs required to be capitalized under section 263A aren’t deductible until the property (to which the costs relate) is sold, used, or otherwise disposed of by the organization.

Exceptions. Section 263A doesn’t apply to:

Personal property acquired for resale if the organization’s average annual gross receipts for the 3 prior tax years were $10 million or less;
Timber;
Most property produced under long-term contract;
Certain property produced in a farming business;
Research and experimental costs under section 174;
Geological and geophysical costs amortized under section 167(h);
Intangible drilling costs for oil, gas, and geothermal property;
Mining exploration and development costs; and
Inventory of an organization that accounts for inventories in the same manner as materials and

Meals. Generally, the organization can deduct only 50% of the amount otherwise allowable for non-entertainment-related meal expenses paid or incurred in an unrelated trade or business. Meals not separately stated from entertainment are generally not deductible. In addition (subject to exceptions under section 274(k)(2)):

Meals mustn’t be lavish or extravagant, and
An employee of the organization must be present at the meal.

Membership dues. The organization can deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain or provide entertainment facilities for members or their guests. In addition, organizations can’t deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities. The organization can’t deduct an expense paid or incurred for use of a facility (such as a

Instructions for Form 990-T (2025) 25

yacht or hunting lodge) for an activity usually considered entertainment, amusement, or recreation.

Amounts treated as compensation. The organization may generally be able to deduct otherwise non-deductible travel, meals, and entertainment expenses if the amounts are treated as compensation and reported on Form W-2 for an employee or Form 1099-NEC for an independent contractor and if the total amount of such compensation isn’t unreasonable.

Reducing Certain Expenses for Which Credits Are Allowable If the organization claims certain credits, it may need to reduce the otherwise allowable deductions for expenses used to figure the credit. This applies to credits such as the following.

Disabled access credit.
Employer credit for social security and Medicare taxes paid on certain employee tips.
Credit for employer-provided childcare facilities and services.
Orphan drug credit.
Credit for small employer pension plan startup costs.
Employer credit for paid family and medical leave.

If the organization has any of these credits, figure each current-year credit before figuring the deduction for expenses on which the credit is based.

Business Startup and Organizational Costs For business startup and organizational costs paid or incurred after September 8, 2008, an organization can deduct up to $5,000 of such costs in the year it begins business (unless the organization elects to capitalize the full amount of such costs). The $5,000 deduction is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero. Any costs not deducted must be amortized, as explained below.

Note: For startup and organizational costs paid or incurred after September 8, 2008, the organization isn’t required to attach a statement or specifically identify the amount deducted for the election under sections 195(b) and 248(a) to be effective. It is a deemed election. Whether an organization deducts a portion of its startup and organizational costs under Regulations sections 1.195-1 and 1.248-1 or elects to amortize the full amount of such costs, its election is irrevocable. For startup and organizational costs paid or incurred after October 22, 2004, and before September 9, 2008, an organization must generally attach the statement required by Regulations sections 1.195-1(b) and 1.248-1(c) to make the election to deduct a portion of such costs (as explained above). This election is irrevocable. However, an organization can apply the provisions of these regulations to costs paid or incurred after October 22, 2004.

Amortization. Any costs not deducted under the above rules must be amortized ratably over the 180-month period, beginning with the month the organization begins business. See the Instructions for Form 4562, Depreciation and Amortization, for details. If the

association elected to amortize business startup and organizational costs paid or incurred before October 23, 2004, over a period of 60 months or more, it must continue to amortize those costs over the elected amortization period. Report the deductible amount of these costs and any amortization on Schedule A (Form 990-T), Part II, line 14. For amortization that began during the tax year, complete and attach Form 4562.

Repairs and Maintenance

Line 3. Enter the cost of incidental repairs and maintenance not claimed elsewhere on the return, such as labor and supplies, that don’t add to the value or appreciably prolong the life of the property.

Bad Debts

Line 4. Enter the total receivables from an unrelated trade or business that were previously included in taxable income and that became worthless in whole or in part during the tax year.

Interest

Line 5. Attach a separate statement listing the interest being claimed on this line.

Interest allocation. If the proceeds of a loan were used for more than one purpose (for example, to purchase a portfolio investment and to acquire an interest in a passive activity), an interest allocation must be made. See Temporary Regulations section 1.163-8T for the interest allocation rules.

Tax-exempt interest. Don’t include interest on indebtedness incurred or continued to purchase or carry obligations on which the interest income is totally exempt from income tax. For exceptions, see section 265(b).

Prepaid interest. Generally, a cash basis taxpayer can’t deduct prepaid interest allocable to years following the current tax year, for example, during the tax year a cash basis taxpayer prepaid interest on a loan. The taxpayer can deduct only that part of the prepaid interest that was for the use of the loaned funds during the tax year, not for the use of the loaned funds during the subsequent years.

Straddle interest. Generally, the interest and carrying charges on straddles can’t be deducted and must be capitalized. See section 263(g).

Original issue discount. See section 163(e)(5) for special rules for the disqualified portion of original issue discount on a high-yield discount obligation.

Interest on certain underpayments of tax. Don’t deduct interest paid or incurred on any portion of an underpayment of tax that is attributable to an understatement arising from an undisclosed listed transaction or an undisclosed reportable avoidance transaction (other than a listed transaction) entered into in tax years beginning after October 22, 2004.

Interest allocable to the production of designated property. Don’t deduct interest on debt allocable to the production of designated property. Interest that is allocable to such property produced by an organization for its own use or for sale must be capitalized. An organization must also capitalize any interest on debt allocable to an asset used to produce the earlier property.

26 Instructions for Form 990-T (2025)

See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15.

Interest on below-market loans. See section 7872 for special rules regarding the deductibility of foregone interest on certain below-market-rate loans.

Limitation on deduction of business interest. Business interest expense is limited to the sum of business interest income, 30% of the adjusted taxable income, and floor plan financing interest. Business interest expense includes any interest paid or accrued on indebtedness properly allocable to an unrelated trade or business. A taxpayer, other than a tax shelter, that meets the gross receipts test isn’t required to limit business interest expense under section 163(j). A taxpayer meets the gross receipts test if the taxpayer has average annual gross receipts that are taken into account in determining its UBTI of $31 million or less for the 3 prior tax years. Gross receipts include the aggregate gross receipts from all persons treated as a single employer such as a controlled group of corporations, commonly controlled partnerships or proprietorships, and affiliated service groups. If the taxpayer fails to meet the gross receipts test, Form 8990 is generally required.

Taxes and Licenses

Line 6. Enter taxes and license fees paid or accrued during the year, but don’t include the following taxes.

Federal income taxes.
Foreign or U.S. territory income taxes if a foreign tax credit is claimed.
Taxes not imposed on your organization.
Taxes, including state or local sales taxes, paid or incurred in connection with an acquisition or disposition of property. These taxes must be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.
Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).
Taxes deducted elsewhere on the return, such as those reflected in cost of goods sold.

See section 164(d) for apportionment of taxes on real property between the buyer and seller.

Depreciation

Line 7. Besides depreciation, include on line 7 the part of the cost, under section 179, that the organization elected to expense for certain tangible property placed in service during the tax year or carried over from the prior tax year. See Form 4562 and its instructions.

Depletion

Line 9. See sections 613 and 613A for percentage depletion rates for natural deposits. Attach Form T (Timber), Forest Activities Schedules, if a deduction is taken for depletion of timber.

Contributions to Deferred Compensation Plans

Line 10. Employers who maintain pension, profit-sharing, or other funded deferred compensation plans are generally required to file Form 5500. This requirement

applies whether or not the plan is qualified under the Code and whether or not a deduction is claimed for the current tax year. Section 6652(e) imposes a penalty for late filing of these forms. In addition, there is a penalty for overstating the pension plan deduction. See section 6662(f).

Employee Benefit Programs

Line 11. Enter the amount of contributions to employee benefit programs (such as insurance, health, and welfare programs) that aren’t an incidental part of a deferred compensation plan included on Schedule A (Form 990-T), Part II, line 10.

Excess Exempt Expenses

Line 12. Enter the amount computed on Schedule A (Form 990-T), Part VIII, line 7 (if applicable), on Schedule A (Form 990-T), Part II, line 12.

Excess Readership Costs

Line 13. Enter the amount computed on Schedule A (Form 990-T), Part IX, line 8a (if applicable), on Schedule A (Form 990-T), Part II, line 13.

Other Deductions

Line 14. Enter on this line the deduction taken for amortization (see Form 4562) as well as other authorized deductions for which no space is provided on the return. Attach a statement listing the deductions claimed on this line. On each Schedule A (Form 990-T), deduct only items directly connected with the unrelated trade or business for which income is reported on that Schedule A (Form 990-T).

Extraterritorial income exclusion. Complete Form 8873 and include the deduction from line 52 in other deductions reported on Schedule A (Form 990-T), Part II, line 14.

Don’t deduct fines or penalties paid to a government for violating any law. The exclusion was repealed generally for transactions after 2004, with some exceptions. See Form 8873 and its instructions.

Net Operating Loss (NOL) Deduction Arising in Tax Years Beginning On or After January 1, 2018

Line 17. The NOL deduction is the NOL carryover and carrybacks that can be deducted in the tax year with regard to each separate trade or business. To be deductible, an NOL must have been incurred in an unrelated trade or business activity. See section 172(a).

Tax Cuts and Jobs Act amendments to section 172. Section 13302 of the Tax Cuts and Jobs Act amended section 172 for tax years ending after 2017, to eliminate NOL carrybacks except for certain farming losses and NOLs of insurance companies other than life insurance companies. See section 172(b), as amended by the Tax Cuts and Jobs Act. Also, see Pub. 225, Farmer’s Tax Guide; Pub. 536, Net Operating Losses for Individuals, Estates, and Trusts; and Pub. 542, Corporations, for additional information. The Tax Cuts and Jobs Act also amended section 172(a)(2) to limit the allowable NOL

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deduction to 80% of taxable income (calculated as described in section 172(a)(2)).

Instructions for line 17. Enter on Schedule A (Form 990-T), Part II, line 17, the NOL carryover from other tax years attributable to that trade or business, but don’t enter more than the amount shown on Schedule A (Form 990-T), Part II, line 16. An organization that claims the deduction with respect to any NOL carried through tax years for which the organization was not required to file Form 990-T must show the amount of the deduction and how it was computed, but the organization need not file a Form 990-T in order to preserve an NOL carryover. See Regulations section 1.512(a)-6(h)(3) for treatment of suspended NOLs resulting from the termination, sale, exchange, or other disposition of a separate unrelated trade or business. After offsetting any gain resulting from the termination, sale, exchange, or disposition of a separate unrelated trade or business, any NOL remaining is suspended. However, the suspended NOLs may be used if that previous separate unrelated trade or business is later resumed or if a new unrelated trade or business that is accurately identified using the same NAICS 2-digit code as the previous separate unrelated trade or business is commenced or acquired in a future tax year.

The amount of an NOL carryover is determined under section 172. See Regulations section 1.512(b)-1(e) and, for organizations with more than one unrelated trade or business, Regulations section 1.512(a)-6(h). Attach a statement showing the computation of the NOL deduction.

Unrelated Business Taxable Income

Line 18. Use the greater of the amount computed on line 18 or zero in the computation of UBTI on Form 990-T, Part I, line 1. A net loss calculated on any Schedule A (Form 990-T), Part II, line 18, can’t be used to offset gain on any other Schedule A (Form 990-T). Accordingly, a net loss on a Schedule A (Form 990-T) should be treated as zero to calculate the amount reported on Form 990-T, Part I, line 1.