IRS Outlines New Tax Law Effect on Tax-Exempt Organizations

 – January 30, 2020
IRS Outlines New Tax Law Effect on Tax-Exempt Organizations

The Internal Revenue Service wants tax-exempt organizations to know about recent tax law changes that might affect them. The Taxpayer Certainty and Disaster Tax Relief Act, passed on Dec. 20, 2019, includes several provisions that may apply to tax-exempt organizations' current and previous tax years.

Repeal of "Parking Lot Tax" on Exempt Employers

This legislation retroactively repealed the increase in unrelated business taxable income by amounts paid or incurred for certain fringe benefits for which a deduction is not allowed, most notably qualified transportation fringes such as employer-provided parking. Previously, Congress had enacted this provision as part of the Tax Cuts and Jobs Act, effective for amounts paid or incurred after Dec. 31, 2017.

Tax-exempt organizations that paid unrelated business income tax on expenses for qualified transportation fringe benefits, including employee parking, may claim a refund. To do so, they should file an amended Form 990-T within the time allowed for refunds. Learn more about this process.

Tax Simplification for Private Foundations

The legislation reduced the 2-percent excise tax on net investment income of private foundations to 1.39 percent. At the same time, the legislation repealed the 1-percent special rate that applied if the private foundation met certain distribution requirements.

The changes are effective for taxable years beginning after Dec. 20, 2019.

Exclusion of Certain Government Grants by Exempt Utility Co-ops

Generally, a section 501(c)(12) organization must receive 85 percent or more of its income from members to maintain exemption.

Under changes enacted as part of the Tax Cuts and Jobs Act, government grants are usually considered income and would otherwise be treated as non-member income for telephone and electric cooperatives. Under prior law, government grants were generally not treated as income, but as contributions to capital.

The 2019 legislation provided that certain government grants made to tax-exempt 501(c)(12) telephone or electric cooperatives for purposes of disaster relief, or for utility facilities or services, are not considered when applying the 85-percent-member income test. Since these government grants are excluded from the income test, exempt telephone or electric co-ops may accept these grants without the grant impacting their tax-exemption.

This legislation is retroactive to taxable years beginning after 2017.