Recent Tax Developments for Nonprofit Organizations and Foundations

Congress Repeals the Nonprofit Parking Tax

The Taxpayer Certainty and Disaster Tax Relief Act of 2019, signed into law on Dec. 20, 2019, repeals the much-discussed nonprofit parking tax enacted as part of the 2017 Tax Cuts and Jobs Act. The Act repeals Section 512(a)(7) of the Internal Revenue Code, under which transportation fringe benefits such as parking and public transit benefits provided by nonprofit employers were subject to a 21% tax. The Act repeals Code Section 512(a)(7) retroactively, as if it were never enacted. This allows nonprofits that have already paid the tax in 2018 and 2019 to seek a refund of any taxes paid. The IRS may issue guidance relating to refund claims, and we will continue to monitor developments.

Simplification of the 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 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 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 1.39% tax is effective for tax years beginning after the date of the enactment of the Act, or Jan. 1, 2020, for foundations with calendar year fiscal years.

Mandatory Electronic Filing of Applications for Tax Exemption

Beginning in January 2020, the IRS will make available an electronic Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Nonprofits will have a three-month transition period beginning upon the release of the electronic Form 1023 during which Form 1023 may be submitted electronically or on paper. Electronic submission will be required following the transition period. The electronic submission system is not yet active, but we are continuing to monitor developments. Let us know if we can assist in submission of an application for exemption.