Last month, Congress retroactively repealed the provision of the 2017 Tax Act that imposed unrelated business income tax on nonprofits that provided qualified transportation fringe benefits to employees. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the 2019 act) was signed into law on Dec. 20, 2019, as part of the Further Consolidated Appropriations Act, 2020, which was enacted to address disaster relief and provide technical corrections and amendments needed to clarify other recent tax law changes. In addition to the repeal of Internal Revenue Code section 512(a)(7) (the parking tax), the 2019 act modified section 4940 to collapse the two-tiered rate structure imposed on net investment income of private foundations into a flat 1.39 percent rate.
Parking Tax Repeal
The 2017 Tax Act amended Internal Revenue Code section 512(a) to require tax-exempt organizations to increase their unrelated business taxable income (UBTI) by the amount paid or incurred for qualified transportation fringe benefits provided to employees. These fringe benefits include mass transit passes and employee parking arrangements. As a result, many exempt organizations had an obligation to file a Form 990-T for the first time — including organizations that do not engage in any actual unrelated trade or business activity and organizations.
With its repeal, nonprofits that reported qualified transportation fringes on IRS Form 990-T as UBTI and paid tax attributable to such income between Jan. 1, 2018, and Dec. 31, 2019, should note that they generally have three years from the date the return was filed to claim a refund. Hopefully, the IRS will “issue guidance on the appropriate steps organizations should take in the refund process so that they can receive the money they are owed without delay and further hardship,” as requested by U.S. Reps. Richard Neal, D-MA, and John Lewis, D-GA, in a letter sent to the IRS on Jan. 8, 2020. Further, nonprofits should ensure that any upcoming tax return filings or estimated tax payments calculations do not include qualified transportation fringe benefits as UBTI.
Net Investment Income Tax Simplification
Despite being exempt from federal income tax under Internal Revenue Code section 501(a) as organizations described in Internal Revenue Code section 501(c)(3), private foundations are subject to an excise tax on their net investment income under the special tax rules that apply to private foundations. Generally, net investment income is the excess of gross investment income, including interest, dividends, rents and royalties plus capital gain net income, over allowable deductions. These allowable deductions are expenses incurred in the production or collection of gross investment income or management of property held for production of such income. Before passage of the 2019 act, the tax was 2 percent of the foundation’s net investment income with the possibility that the tax may be reduced to 1 percent in certain circumstances.
Over the years, various bills have been introduced in Congress to simplify the private foundation tax on net investment income by replacing the current two-tier tax with a single rate. For example, in 2014, U.S. Rep. Dave Camp, R-MI, chairman of the U.S. House of Representatives’ Ways and Means Committee, released a discussion draft of a Tax Reform Act of 2014 that included replacing the tax with a single, 1 percent tax rate. The two-tiered rate was established to encourage private foundations to increase their qualified distributions to qualify for the lower 1 percent tax rate, but it also increased the burden and complexity of tax compliance.
The 2019 act modified Internal Revenue Code section 4940 to collapse the two rates into a flat rate of 1.39 percent effective for tax years that begin after Dec. 20, 2019. The new 1.39 percent tax rate selected was deemed to be “revenue neutral” to the federal government based on the amount of taxes paid overall by private foundations in the past. For private foundations that did not qualify for the 1 percent rate, this change results in tax savings. However, for those private foundations that met the requirement to pay the lower 1 percent rate, they will see a tax increase from this change. Overall, private foundations should benefit from reduced complexity and burden of calculating the net investment income tax and predicting estimated tax payment obligations.
In addition to the repeal of the parking tax and the modification of the net investment income tax rate, the 2019 act also included a temporary suspension of the charitable deduction income percentage limitations for individuals and corporations for qualified contributions to support disaster relief made between Jan. 1, 2018, and Feb. 18, 2020.