Three Tax Law Changes Affecting Nonprofits
The Taxpayer Certainty and Disaster Tax Relief Act passed late last year includes three significant tax law changes that can affect not-for-profit organizations. They deserve your attention now because the law's provisions may affect the current tax year — and even previous tax years. The following are brief summaries of the changes.
1. Parking Lot Tax Repealed
The new law retroactively repeals the so-called “parking lot tax,” (also known as the “church parking tax”) which became effective in 2017 with passage of the Tax Cuts and Jobs Act (TCJA). Over the past couple of years, the tax has been widely criticized by nonprofit organizations.
The tax came about when the TCJA eliminated deductions for certain commuter transportation fringe benefits. This included employee benefits for transportation using qualified vans and mass transit passes and for onsite parking. The TCJA also increased the unrelated business income tax (UBIT) by the disallowed amount of deductions for:
- Parking privileges on or near an employer's premises and
- Parking on or near locations from which employees commute using mass transit, commuter highway vehicles or carpools (for example, reserved parking in a train station lot).
These TCJA provisions applied to amounts nonprofit employees paid or incurred for parking privileges after 2017. Thus, some nonprofits faced new UBIT liability in 2018.
Fortunately, the new law wipes the TCJA's nonprofit parking provision off the books. The law is retroactive to January 1, 2018. So if your organization paid UBIT expenses for qualified transportation fringe benefits, including employee parking, you can file for a refund by submitting an amended Form 990-T within the time allowed for refunds. For information specific to your nonprofit, contact your tax advisor.
2. Tax Simplified for Private Foundations
The new law makes it easier for private foundations to calculate tax and can reduce tax liability for many foundations. Unlike public charities, which are essentially tax-exempt except for potential UBIT, private foundations are subject to an excise tax on their net investment income. Prior to the new law, private foundations paid this investment tax in two tiers. In the first, tax was equal to 2% of net investment income. In the second, the 2% tax could be reduced to 1% if the foundation met certain distribution requirements during a five-year rolling average measurement period.
The new law takes the guesswork out of the equation. Now, private foundations are required to pay a single-tier investment excise tax equal to 1.39% of net investment income. This change is intended to simplify the calculation and reporting requirements.
Note that the private foundation excise tax change is effective for tax years beginning after December 20, 2019. Therefore, private foundations with a calendar year ending December 31, 2019 immediately benefit from the simpler calculation.
3. Certain Government Grants to Coops Excluded from Income Test
Section 501(c)(12) of the tax code provides a federal income tax exemption for:
- Benevolent life insurance associations of a purely local character,
- Mutual ditch or irrigation companies,
- Mutual or cooperative telephone companies,
- Electric companies, or
- “Like organizations.”
Typically, these section 501(c)(12) organizations must receive 85% or more of their income from members to maintain their tax exemption. Before the TCJA, government grants generally weren't treated as income, but as contributions to capital. However, under a provision in the TCJA, government grants were considered and treated as nonmember income for telephone and electric cooperatives.
The new law provides that certain government grants made to tax-exempt 501(c)(12) telephone or electric coops for purposes of disaster relief, or for utility facilities or services, aren't considered when applying the 85% test. Since these government grants are excluded from the income test, exempt telephone or electric coops can accept these grants without the income affecting their tax exemption status. This provision is retroactive to tax years beginning after 2017.
Even if your organization has never been required to pay unrelated business income tax (UBIT), you should understand what it is and when it may apply.
Unrelated business income (UBI) is generally defined as gross income derived from a trade or business that's regularly carried out and is unrelated to a nonprofit's tax-exempt purpose. The IRS cites the example of a hospital auxiliary that operates a paid parking lot every Saturday year-round. Income from such a source may be subject to UBIT. However, there are exclusions and exceptions to the law, so it pays to discuss your situation with your tax advisor.
Do one or more of these three tax law changes affect your organization? To ensure you're meeting your tax obligations but not paying more than required, talk to a tax professional.