The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act) was signed into law on December 20, 2019, as part of the Further Consolidated Appropriations Act, 2020 (PL 116-94). The Act contained a number of changes that address concerns raised by the exempt organizations sector, including most notably the repeal of the Section 512(a)(7) tax on qualified transportation fringes, often referred to as the “parking tax,” and the simplification of the Section 4940(a) tax on private foundation net investment income to a flat 1.39% rate, an increase of nearly 40% for many private foundations accustomed to paying the 1% rate.
Parking Tax Repeal
Congress enacted the parking tax two years ago as part of the Tax Cuts and Jobs Act (TCJA). The tax is the nonprofit corollary to the deduction disallowance for qualified transportation fringes under Section 274 applicable to taxable employers. The Section 512(a)(7) tax worked by imposing unrelated business income tax on any qualified transportation fringe expenses paid by a tax-exempt employer if such expense would have been nondeductible to a taxable employer under Section 274.
The tax was difficult to apply in practice and created uncertainties for nonprofits, including how to apply deductions for expenses directly connected with the provision of employee parking. Many viewed the tax as unfair because it applied to an employer’s cost of providing parking, even if the parking had no value, such as in rural or suburban parking lots where free parking was readily available.
Congress responded to these and other complaints about the tax by full, retroactive repeal, as if the tax had never been enacted under the TCJA. The Internal Revenue Service (IRS) and the US Department of the Treasury are expected to publish guidance on how to seek a refund for any tax imposed under Section 512(a)(7), which will likely involve filing an amended Form 990-T for any tax year in which the tax was paid. US Representatives Richard Neal and John Lewis sent a letter to the IRS on January 8, 2020, requesting that the IRS establish an expedited process to obtain such refunds and to “promptly 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.”
Private Foundation Net Investment Income Tax Simplification
Prior to modification under the Act, Section 4940 imposed a two-tiered tax on the net investment income of private foundations. This enabled certain private foundations to pay a reduced 1% tax rate instead of the generally applicable 2% rate in any year in which the foundation paid higher-than-average qualifying distributions according to a complex formula. The two-tiered rate was intended to encourage private foundations to increase their qualified distributions in order to qualify for a lower tax rate, but it also increased the burden and complexity of tax compliance.
After a multiyear effort by representatives of the exempt organization sector requesting changes to the two-tiered tax rate, Congress modified Section 4940 to collapse the two rates into a flat rate of 1.39%. Economists determined this percentage to be “revenue neutral” such that the federal government would not gain or lose any revenue as compared to prior law.
While this has simplified the tax, the new flat rate will result in an increased tax burden for many large private foundations that have previously qualified for the lower 1% rate. Foundations that did not make higher-than-average qualifying distributions to take advantage of the 1% rate will receive the benefit of a reduced tax rate.
The flat rate is effective for tax years beginning after the date of enactment. The IRS will likely revise Form 990-PF and the instructions to the form soon to accommodate the change in law. Going forward, private foundations should benefit from reduced complexity and administrative burden of calculating the net investment income tax.
Other Notable Changes
A number of other changes under the Act of interest to exempt organizations include:
- Temporary suspension of the Section 170 charitable deduction income percentage limitations for individuals (60% of taxable income) and corporations (10% of taxable income) for qualified contributions to support disaster relief made from January 1, 2018, through February 18, 2020.
- Temporary extension of the Section 222 above-the-line deduction for qualified tuition and related expenses that expired in 2017.
- Temporary extension of the Section 179D deduction for energy efficient commercial buildings.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was also enacted as part of the Further Consolidated Appropriations Act, 2020, and contains major retirement plan changes that may be of interest to exempt organizations. A recent LawFlash summarizes the key terms of the new retirement plan legislation.