Foundations and other nonprofit entities received some last-minute “gifts” on December 20, 2019 when President Trump signed the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (“Act”) into law.
Simplification of Private Foundation Excise Taxes
The first gift was a provision that changes the excise tax that private foundations pay on their net investment income. A flat tax of 1.39% has replaced the previous two-tiered system (a 2% tax that could be decreased to 1% if charitable distributions met certain complex requirements). This flat tax applies to tax years starting after December 20, 2019.
Flat Tax on Private Foundations
Many foundations have been hoping for a flat tax to simplify their tax planning, and this change will be especially helpful to smaller foundations who lack the headcount needed to manage the complexities of the previous system. The flat tax removes a foundation’s need to constantly monitor their investment and grant activities to ensure that these are meeting the complicated requirements to qualify for the 1% tax rate. Keep in mind that not all foundations will welcome the flat tax, as it will mean a bit of a tax hike for those organizations who have been able to consistently meet the requirements for the 1% tax rate.
Repeal of the “Nonprofit Parking Tax”
Another gift from the Act was the repeal of Section 512(a)(7) of the 2017 Tax Cuts and Jobs Act (TCJA), which required nonprofits to pay a 21% income tax on the costs of transportation benefits (such as parking and public transportation) that they provided to their employees, even if their employees paid for these expenses via a pre-tax wage reduction system.
This repeal is retroactive to the date of the TCJA enactment, so nonprofits will likely be able to file for a refund of these taxes paid in 2018 and 2019. We expect the IRS to respond to this legislation by providing guidance or a specific procedure regarding refund claims.
If your foundation or exempt organization has questions about this new legislation, please contact your Warner attorney or Jennifer Remondino at firstname.lastname@example.org
(or at 616.396.3243).