President Donald Trump signed a government funding bill on Dec. 20, 2019 with a $428 billion tax package that includes important changes for tax-exempt entities that retroactively repeals the inclusion of transportation fringe benefits in determining unrelated business income and prospectively changes the tax rate paid on net investment income by private foundations.
The Tax Cuts and Jobs Act (TCJA) originally added IRC Section 512(a)(7), which required nonprofit organizations that provide qualified parking and transportation fringe benefits to employees to increase their unrelated business income by the cost of the benefits provided. Commonly referred to as the “parking tax,” this provision proved both extremely unpopular and costly for non-profit organizations. The new tax package repeals IRC Section 512(a)(7) in full retroactively to its original enactment.
A non-profit organization that previously filed Form 990-T and paid tax under the parking tax provision should discuss with their tax advisor the mechanism by which to obtain a refund for amounts paid to date. Further, organizations that used net operating loss (NOL) to offset a parking tax liability should re-evaluate their available NOL. An organization that has made estimated and extension payments associated with the parking tax may consider seeking a refund of the amounts.
Under IRC Section 4940, private foundation excise tax rules currently provide for a 1% or 2% tax rate on net investment income, depending on the distribution activities of the private foundation. The tax package modifies this provision by replacing the rate calculation with a single 1.39% rate. This provision is effective for tax years beginning after Dec. 20, 2019.
Private foundations should update their work papers for payment calculations for tax years beginning after Dec. 20, 2019, to ensure the new rate is used for proper calculation of tax due.
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