Not-for-Profit Alert: House, Senate and Now President Trump Approve Legislation with Significant Provisions for Tax Exempts
By Israel Tannenbaum
December 23, 2019
Late last week, the House and the Senate approved The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the “Act”), which was signed into law by the President, that repeals the tax on nonprofit transportation benefits. Specifically, the Act repeals the section 512(a)(7) which requires tax-exempt organizations to include in unrelated business taxable income the amounts they pay or incur on qualified transportation fringe benefits. This was approved as part of a large bill that also includes hundreds of billions of dollars in funding for several federal departments, and a package of other tax provisions.
PARKING – The 2017 Tax Cuts and Jobs Act (TCJA) imposed an unrelated business income tax of 21 percent on the expenses nonprofits incur for providing employee benefits like transit passes and employee parking. Congratulations! This is now repealed.
The legislation states that the measure “shall take effect as if included in the amendments made by section 13703 of Pub. L. No. 115-97” so that the repeal of section 512(a)(7) would apply retroactively to the date of its enactment of the TCJA (December 22, 2017), thus treating the tax liability as if it never existed.
The passing of this bill into law is great news for exempt organizations as it completely removes this burdensome taxation from not-for-profits.
It is expected that the IRS will issue guidance on refund procedures for tax-exempt organizations that paid unrelated business income tax on qualified transportation fringe expenses under section 512(a)(7).
Another important part of this legislation is a provision to flatten the rate of tax on the net investment income of private foundations to 1.39%, replacing the current two-tier tax of either 2% or 1%.
Previously, private foundations were subject to a 2% tax, which could be reduced to 1% if the private foundation’s charitable distributions in a given year exceeded the private foundation’s average payout rate over the preceding five years. The two-tiered often created a disincentive for private foundations to increase grant-making, as increasing grant-making 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).
This provision was originally included as part of the TCJA, however it was ultimately not included in the final bill.
This will provide some relief to private foundations who had been in the 2% tax rate, and should increase the dollars available for charitable giving, however it remains to be seen if the additional tax burden for the foundations who had been paying 1% will offset this.
Please contact your Mazars USA LLP professional for additional information.