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December 30th, 2019
Tax Act Changes Affecting Tax Exempt Organizations
Here’s some good news for charitable organizations. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the "Act"), signed into law on December 20, 2019 as part of a spending bill to fund the government through September 2020, repeals the notorious "nonprofit parking tax" and simplifies the excise tax on private foundation investment income.
Repeal of Nonprofit Parking Tax
Under Internal Revenue Code (“IRC”) Section 512(a)(7), which was enacted as part of the 2017 Tax Cuts and Jobs Act, transportation fringe benefits such as parking and public transit benefits provided by nonprofit employers have been subject to the tax on unrelated business taxable income (“UBTI”) imposed on tax-exempt organizations. The imposition of this tax resulted in nonprofit employers having to pay a 21% tax on parking and transit benefits provided to their employees, even if the employees paid for those benefits themselves through pretax salary reduction and even if those benefits were required by local laws.
The Act repeals IRC Section 512(a)(7) retroactively to its enactment, meaning that tax-exempt organizations will no longer have to pay the tax and, for those that have already paid the tax in 2018 and 2019, may seek a refund of the taxes paid. The IRS is likely to issue guidance regarding refund claims.
Simplification of Private Foundation Excise Tax
The Act simplifies the excise tax on private foundation investment income imposed by IRC Section 4940(a), replacing the current two-tiered system (2% and 1%) with a flat, revenue-neutral rate of 1.39%. Previously, non-operating private foundations were subject to a 2% tax, but the tax could be reduced to 1% for private foundations making qualifying distributions in excess of certain amounts.
The two-tiered system was complicated and difficult to administer and required a foundation’s staff to constantly monitor and adjust the foundation's investments and grants. It also could create a disincentive for a private foundation to increase its grantmaking in certain circumstances, as increased grantmaking could trigger the higher 2% tax.
The 1.39% tax rate is effective for tax years beginning after the date of enactment of the Act (January 1, 2020 for calendar year foundations).