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Tax-extenders legislation that President Trump signed into law on December 20, 2019, has implications for tax-exempt organizations. Specifically of interest to exempt organizations, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (1) retroactively repeals IRC Section 512(a)(7), which effectively imposed unrelated business income tax (UBIT) on qualified transportation fringe benefits offered by exempt organizations; (2) modifies the excise tax rate on private foundations’ investment income; (3) tightens the requirements certain mutual or cooperative utility companies must meet to qualify as tax-exempt; and (4) temporarily increases the limitation on deductions for qualified charitable contributions.

UBTI for transportation fringe benefits

Section 302 of the legislation repeals IRC Section 512(a)(7), which was added to the code by the Tax Cuts and Jobs Act. IRC Section 512(a)(7) treated as unrelated business taxable income (UBTI) amounts an exempt organization paid or incurred to provide certain transportation fringe benefits to its employees. This change is effective “as if included in the amendments made by section 13703 of Public Law 115-97,” meaning IRC Section 512(a)(7) is repealed as if it were never enacted.

Excise tax rate for private foundation investment income

Section 206 of the legislation lowers the 2% excise tax under IRC Section 4940(a) on the net investment income of tax-exempt private foundations to 1.39%. In addition, Section 206 of the legislation eliminates IRC Section 4940(e), which allowed a 1% tax rate to apply, in place of the 2% rate, if a private foundation met certain distribution requirements. These changes apply to tax years that begin after December 20, 2019.

Income requirements for mutual or cooperative telephone or electrical companies

Limitation on qualified charitable contributions

Section 204 of the legislation suspends the current limitation on deductions for charitable contributions made under IRC Section 170(b) and (d) for relief efforts in one or more qualified disaster areas. It also suspends the limit on carryovers of excess contributions.

Implications

The enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 was favorable in many ways for tax-exempt organizations. For mutual or cooperative telephone or electrical companies, however, the new law adds certain complexities.

UBTI for transportation fringe benefits

Since enactment of the TCJA, tax-exempt organizations have been working to get IRC Section 512(a)(7) repealed. Numerous organizations have commented on the complexity of calculating the amount to be included in UBTI, as well as the practical application of the provision.  Due to the uncertainty and confusion surrounding the application of IRC Section 512(a)(7), exempt organizations complied with the provision differently, which only heightened the confusion and increased the call for repeal.  

Because the repeal of IRC Section 512(a)(7) is fully retroactive, taxpayers that included qualified transportation fringe benefit expenses as UBTI on Form 990-T may now request a refund of any excess unrelated business income tax paid to the IRS.  Although it remains to be seen whether the IRS will announce less burdensome methods of obtaining relief, many exempt organizations should consider filing an amended Form 990-T for all periods in which the organization paid unrelated business income tax on qualified transportation fringe benefit expenses that were included as UBTI.  Similar opportunities may exist for taxpayers that also reported these amounts as UBTI for state and/or municipal income tax purposes.  In addition, some organizations, as part of their tax-planning efforts in response to IRC Section 512(a)(7), made adjustments to their parking facilities to reduce their UBTI, including the removal of employee reserved parking spaces. With the repeal now in effect, these organizations may want to revisit these adjustments for their non-tax impact.

Although IRC Section 512(a)(7) was repealed for tax-exempt organizations, IRC Section 274(a)(4), which disallows deductions for qualified transportation fringe benefits, remains in effect. 

Excise tax on private foundations

Private foundations can now plan for a flat tax rate of 1.39% on net investment income for tax years beginning after December 20, 2019, eliminating the need for planning efforts to meet certain distribution thresholds.  The streamlined 1.39% tax rate was chosen because it was revenue neutral, imposing no cost to the federal Treasury.  Although private foundations that were subject to the 1% tax rate will experience a slightly higher tax rate going forward, the time and effort historically spent planning for the reduced 1% tax rate, and completing Part V of Form 990-PF annually, can now be used to further philanthropic goals and needs.

Income requirements for mutual or cooperative telephone or electrical companies

The legislation will add complexity for organizations subject to IRC Section 501(c)(12) that receive federal, state and local grants for both infrastructure expansion and disaster relief. Thus, certain cooperatives that have already received such grants or are anticipating future funds should make certain that these amounts do not exceed 15% of the organization’s income, now narrowly defined as “amounts collected from members for the sole purpose of meeting losses and expenses,” in a given year. When possible, it may be necessary to structure the timing of the grant funds in a way that does not jeopardize the organization’s tax-exempt status.

Limitation on deduction for qualified charitable contributions

By suspending the current limitation on deductions for qualified charitable contributions, Congress has made charitable giving to certain tax-exempt entities more appealing. Organizations that receive a significant amount of charitable contributions may consider sending out communications to their donors to help raise awareness of the change in the law and the potential increased tax benefits to donors.

Please contact your Ernst & Young LLP tax professional with any questions.

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