On December 17, 2019, lawmakers and administration officials released a tax plan that includes two provisions of interest to the nonprofit community. The first is a retroactive repeal of Internal Revenue Code Section (IRC) 512(a)(7) and the second is a change to the tax rate paid by private foundations on net investment income. These provisions, along with other spending bills, are expected to be passed by Congress and signed by the President by December 20.
Repeal of IRC 512(a)(7)
IRC 512(a)(7) imposes a 21% unrelated business income (UBI) tax on tax-exempt organizations that provide qualified transportation fringe benefits (QTFs) to employees. IRC 512(a)(7) was added by the Tax Cuts and Jobs Act (TCJA) on December 22, 2017 and is effective for amounts paid for QTFs after December 31, 2017. QTFs include non-taxable parking and transit benefits provided to employees directly by the organization or paid for by employee pre-tax salary deferrals.
IRC 512(a)(7) is wildly unpopular and has impacted tax-exempt organizations of all sizes. The provision has resulted in many organizations filing a Form 990-T for the first time. In addition to the 21% tax liability on QTFs provided, organizations have also seen increased compliance costs for navigating the changes imposed by TCJA. Repeal would be welcome relief for the nonprofit sector.
Change of Private Foundation Tax Rate on Investment Income
Under IRC 4940, private foundations pay a 2% excise tax on net investment income. A private foundation may pay a reduced 1% rate if its qualifying distributions in the current year are equal to or exceed the sum of the noncharitable use assets times the average percentage payout for the base period (generally the five preceding years). The tax plan eliminates this two-tiered rate system and replaces it with a flat 1.39% tax rate on net investment income. If passed, this provision will apply to taxable years beginning after the enactment of the law change.
Note: a similar provision was originally included in the TCJA but was dropped before the law was passed.
We will continue to monitor the progress of the legislation and provide updates as it moves through the process.
Richard J. Locastro, CPA, JD
Partner and Director, Nonprofit Tax
Stephen J. Kelin, CPA, JD
Principal, Nonprofit Tax