Two changes have been signed into law that could have significant impacts on nonprofit entities and organizations.
The tax plan signed into law by President Trump on Friday, Dec. 20, includes two provisions of interest to the nonprofit community. The first is a retroactive repeal of IRS Code Section 512(a)(7), and the second is a change to the tax rate paid by private foundations on net investment income.
Here’s a closer look at each:
Repeal of IRC 512(a)(7)
This regulation, which became law as part of the Tax Cuts and Jobs Act (TCJA) in December 2017, had imposed a 21% unrelated business income (UBI) tax on tax-exempt organizations that provide qualified transportation fringe benefits (QTFs) to employees. Because this regulation included parking and transportation benefits provided to employees by the organization, it led to nonprofit organizations of all sizes having to file a Form 990-T for the first time.
In addition to the 21% tax incurred, the law resulted in organizations paying additional compliance costs. The new bill repeals the additional tax retroactively, which means it will be treated as if it was never enacted. It is unclear at this time how the IRS plans to process refunds for taxes previously paid.
Change to private foundation tax rate
As part of IRC 4940, private foundations were required to pay a 2% excise tax on net investment income, or 1% if the group’s qualifying distributions in the current year were equal to or exceeded the sum of noncharitable use assets times the average percentage payout for the base period. Now, under the new provisions, the two-tiered system is eliminated and replaced with a flat 1.39% tax rate on net investment income. This change will go into effect for the 2020 tax year.
If you have questions about how these changes could affect your organization, please contact Fran Leahy or Sandy Long on the KraftCPAs nonprofit industry team. We’ll be happy to help.