The IRS posted guidance to its website on January 21 explaining how nonprofits can seek refunds of the "parking tax." As described in our prior alert, Section 512(a)(7) of the Internal Revenue Code had imposed a 21% tax on employee transportation benefit expenses incurred by nonprofits. In December 2019, Congress passed legislation to retroactively repeal the so-called parking tax, however, opening the door for the many nonprofits that had already paid the tax to seek refunds.
Procedure for Claiming Refunds
To claim a refund of the tax reported on its Form 990-T for 2017 or 2018 under Section 512(a)(7), a nonprofit should file an amended Form 990-T and write "Amended Return" at the top. If the amended return is filed only to claim a refund due to the repeal of Section 512(a)(7), nonprofits should write "Amended Return – Section 512(a)(7) Repeal" at the top instead. Nonprofits should then complete the Form 990 T, as they originally did, except with regard to the parking tax. For example, for an amended 990-T for fiscal year 2017, nonprofits should reduce the amount entered on Line 12 (or the other line on which the nonprofit entered the transportation fringe benefits incurred) by the amount of transportation fringe benefits incurred. Nonprofits that did not have any other unrelated business income for fiscal year 2017 should simply enter "0" on the line on which they originally reported the transportation fringe benefits incurred. For an amended Form 990-T for 2018, nonprofits should enter "0" on Line 34 (transportation fringe benefits). The treatment is different for the two years because the IRS had time to update the form in relation to parking tax for the 2018 filing cycle.
Additional Considerations – Timing Issues and State Tax Refunds
Nonprofits should remember that statutes of limitations apply to refund claims. Typically, a refund cannot be claimed after the later of (i) three years from the time the original Form 990 T was filed; or (ii) two years from the time the tax was paid.
Nonprofits that paid state income taxes based on Section 512(a)(7) should also consider filing amended state tax returns to claim refunds of state taxes. Nonprofits should follow the applicable state's regular refund procedure, unless the state issues other guidance.
Nonprofits that paid estimated taxes in 2019 based on Section 512(a)(7) might have to wait until they file their Form 990-T for 2019 to claim a refund of the estimated tax paid unless the IRS begins automatically generating these refunds.
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The IRS guidance is a welcome response to the nonprofit community's request for prompt clarification on the steps required to obtain refunds of the parking tax.
If you have questions or would like more information on these issues, please contact Venable's Nonprofit Organizations Practice.