Repeal of the UBI Tax on Nonprofits Providing QTFs

On Friday, December 20, 2019, President Trump signed “The Taxpayer Certainty and Disaster Tax Relief Act of 2019” (the Act) as part of a spending bill to fund the government through September 2020. The Act includes a provision to retroactively repeal Internal Revenue Code Section (IRC) 512(a)(7). IRC 512(a)(7) was added by the Tax Cuts and Jobs Act (TCJA) On December 22, 2017 and imposed a 21% unrelated business income (UBI) tax on tax-exempt organizations that provide qualified transportation fringe benefits (QTFs) to employees. QTFs include both non-taxable parking and transit benefits provided by the organization, and employee pre-tax salary deferrals that may be used for parking and/or transit expenses.

IRC 512(a)(7) was wildly unpopular and impacted tax-exempt organizations of all sizes. Repeal of this provision is welcome relief for the nonprofit sector. The provision resulted in many organizations filing a Form 990-T for the first time to report UBI. In addition to the 21% tax liability on QTFs provided, organizations also saw an increase in the cost of compliance in navigating the changes imposed by TCJA.

The question now is how do these organizations get back the taxes previously paid? Presumably, the organizations will file amended returns for the years in which they paid tax and/or estimates. This will, of course, add to the compliance costs tax-exempt organizations incurred as a result of this enactment and retroactive repeal.

Practitioners now await guidance from the IRS regarding procedures for requesting refunds of amounts previously paid and deposited towards their tax liability on providing QTFs. We are hoping that the IRS will provide a streamlined process to relieve some of the compliance burden. GRF will continue to provide updates as they are available, and will be in touch with suggested next steps for obtaining a refund on QTF taxes paid.

Private Foundation Tax Rate Change

Another item of interest to the nonprofit community included in the legislation is a change to the private foundation investment income tax to a flat tax of 1.39%. Under IRC 4940, private foundations pay a 2% excise tax on net investment income. A private foundation may qualify for a reduced 1% rate if its qualifying distributions in the current year are equal to or exceed the sum of the non-charitable use assets times the average percentage payout for the base period (generally the five preceding years). The law signed on Friday eliminates this two-tiered rate system and replaces it with a flat 1.39% tax rate on net investment income. This provision applies to taxable years beginning after December 20, 2019 (January 1, 2020 for calendar year foundations).

Update: Ways and Means Committee Chairman Richard E. Neal (D-MA) and Ways and Means Oversight Subcommittee Chairman John Lewis (D-GA) have called on IRS to provide an expedited process for tax-exempt organizations to obtain refunds of unrelated business income tax (UBIT) paid on parking and transportation benefits provided to their employees. Read the letter. GRF will issue an updated industry alert when more information is available.

More Information

Visit GRF’s Nonprofit Tax page for more information or speak with one of the contacts below.

Contacts

Richard J. Locastro, CPA, JD
Partner and Director, Nonprofit Tax
rlocastro@grfcpa.com
301-951-9090

 

Stephen J. Kelin, CPA, JD
Principal, Nonprofit Tax
skelin@grfcpa.com
301-951-9090