Parking Tax Repealed; Private Foundation Excise Net Investment Income Tax Standardized to 1.39%
NONPROFIT PARKING TAX REPEAL
The Congress repealed the Section 512(a)(7) “Church Parking Tax” or the “Nonprofit Parking Tax,” as part of the 2020 government funding package (the Further Consolidated Appropriations Act, 2020).
Section 512(a)(7) was originally added to the tax code under the 2017 Tax Cuts and Jobs Act. The provision imposed a tax on certain transportation related benefits provided by nonprofit employers to their employees. Specifically, nonprofit employers were subject to “unrelated business income tax” on the cost of providing parking facilities on or near their place of business, as well as “qualified transportation fringe benefits,” including transit and parking passes provided by the employer and certain commuting expenses.
This tax was unpopular with the nonprofit community, as nonprofits were confronted with complex filing requirements based on providing parking to employees (which is a common benefit). The tax was imposed based on the nonprofit’s expenditures (rather than income). The tax applied even if an employer was required by local law to provide the benefits to employees. The imposition of the tax required many more tax-exempt entities to have a filing obligation to file a Form 990-T (which is required to be filed when the organization has “unrelated business income tax”).
Because the repeal of this provision is retroactive to the date of its enactment, the repeal applies to any tax liability incurred since enactment. Nonprofit employers that paid tax under this provision in 2017 or 2018 should be eligible for a refund.
PRIVATE FOUNDATION EXCISE TAX ON NET INVESTMENT INCOME STANDARDIZED TO 1.39%
Excise taxes on private foundations were simplified by the 2020 Appropriations Act. Since 1969, private foundations have been subject to a two-tiered tax regime. Under the rules, the private foundation paid either a 1% or 2% tax on net investment income depending on the private foundation’s charitable expenditures. This dual regime is now eliminated, and the excise tax on net investment income for private foundations is changed to a single rate of 1.39%. This change is effective for tax years beginning after the date of the Act’s enactment (December 20, 2019).
While this change means a private foundation can no longer qualify for a reduced 1% net investment income tax, it also streamlines the tax and allows private foundations to increase distributions in times of need without a penalty.
PERCENTAGE LIMITATION ON CHARITABLE INCOME TAX DEDUCTION
There are other provisions in the 2020 Appropriations Act with impact in the nonprofit sector. For a limited time, qualified contributions made to public charities (section 501(c)(3) organizations that are not qualified as private foundations) for relief in qualified disaster areas will not be subject to the percentage limitations on charitable contributions. The income tax limitations are suspended for these types of gifts from January 1, 2018 to February 18, 2020.
As a reminder, donors are eligible to receive a charitable income tax deduction limited by a percentage of the donor’s adjusted gross income. An individual donor may claim a deduction of up to 60% of their adjusted gross income for cash contributions to public charities. Charitable contributions in excess of this amount may be carried forward for 5 years (the percentage limitation is 50% of AGI for non-cash gifts and 30% of AGI for contributions of capital gain property). Corporations (other than S-corporations) may deduct up to 10% of their adjusted gross income.
Under the new provision, “qualified contribution” is defined as any charitable contribution that is 1) paid during the limited period, 2) for the purpose of disaster relief efforts in a qualified disaster area, where 3) the taxpayer obtains written acknowledgment from the charity that the contribution was used for these relief efforts, and 4) the taxpayer has elected to be subject to this provision. A “qualified disaster area” is any area in which a major disaster was declared by the President. The California wildfire disaster is not included under this provision. This provision does not apply to contributions made to contributions made to a private foundation, 509(a)(3) supporting organization or to a donor advised fund. Contributions must be made by February 18, 2020 to be eligible.