The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the "Act"), signed into law on December 20, 2019 as part of a spending bill to fund the government through September 2020, repeals the notorious "nonprofit parking tax." The Act also simplifies the private foundation excise tax on investment income and provides special treatment for disaster relief donations to public charities.
Repeal of Nonprofit Parking Tax
The Act repeals Section 512(a)(7) of the Internal Revenue Code of 1986 (the "Code"). Under Code Section 512(a)(7), which was enacted as part of the 2017 Tax Cuts and Jobs Act, transportation fringe benefits such as parking and public transit benefits provided by nonprofit employers were subject to the Unrelated Business Income Tax (UBIT). This extraordinary tax, which was imposed on expenditures rather than income, meant that employers had to pay a 21% tax on parking and transit benefits made available to their employees, even if the employees paid for those benefits themselves through pretax salary reduction, and even if local laws mandated that employers provide those benefits. Thus, many nonprofits were hit with large and unexpected tax bills in 2018 and 2019.
The Act repeals Code Section 512(a)(7) retroactively, as if it were never enacted. This not only means nonprofits will no longer have to pay the tax, but opens the door for the many nonprofits that have already paid the tax in 2018 and 2019 to seek a refund of the taxes paid. It seems likely that the IRS will release guidance regarding refund claims, and we will continue to monitor developments.
Simplification of Private Foundation Excise Tax
The Act simplifies the private foundation excise tax on investment income under Code Section 4940(a), replacing the current two-tiered system (2% and 1%) with a flat, revenue-neutral rate of 1.39%. Previously, private foundations were subject to a 2% tax, which could be reduced to 1% if the private foundation's charitable distributions (measured as a percentage of its investment assets) in a given year exceeded the private foundation's average payout rate over the preceding five years—by an amount that is at least equal to the tax savings the foundation would enjoy from the reduced rate. The two-tiered system was complicated and difficult to administer and required foundation staff to constantly monitor and adjust the foundation's investments and grantmaking. Furthermore, it often created a disincentive for private foundations to increase grantmaking to meet unanticipated needs, as increasing grantmaking could trigger the higher 2% tax. For these reasons, the private foundation sector has long advocated for a flat excise tax rate. The 1.39% tax rate is effective for tax years beginning after the date of enactment of the Act (January 1, 2020 for calendar year foundations).
Special Temporary Treatment for Disaster Relief Donations
The last few years have seen many natural disasters, including hurricanes, tornadoes, forest fires, heat waves, earthquakes, and typhoons. Many Americans have given generously to help the victims. To ensure that these donors do not run up against the limits on charitable tax deductions for individuals, the Act creates a special temporary exception to those limits for disaster relief donations.
Individual taxpayers may not claim a charitable deduction for a cash contribution to a Code Section 501(c)(3) public charity to the extent such contribution exceeds 60% of the individual's adjusted gross income. Corporate taxpayers may not claim a deduction that exceeds 10% of their taxable income. Contributions in excess of these percentage limitations may generally be carried forward for up to five taxable years.
The Act suspends the 60% and 10% limitations for contributions made to public charities for disaster relief efforts. The special treatment applies to contributions made in 2018 and 2019, as well as contributions made within 60 days after passage of the Act. The donor must obtain an acknowledgment from the charity that the donor's contribution was used (or will be used) for disaster relief efforts. Thus, donors that made cash contributions for disaster relief efforts in 2018 or 2019, as well as donors that make such contributions within 60 days after the Act's passage, will be able to deduct the full amount of those contributions, even if the contributions exceed the applicable 60% or 10% limit.
If you have questions or would like more information on these issues, please contact Venable's Nonprofit Organizations Practice.