Nonprofits are entering the new year with a significant financial burden lifted off their shoulders – that of the 21% tax imposed by the Tax Cuts and Jobs Act (TCJA) on nonprofits for employer-provided transportation fringe benefits, such as parking and public transportation.
A federal spending bill that was signed into law on December 20, 2019 included the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act), which completely repeals the nonprofit transportation benefit tax in 2020 and retroactively for 2018 and 2019.
Under the TCJA, nonprofit employers had to pay a 21% Unrelated Business Income Tax (UBIT) on all parking and public transit benefits provided to their employees. The tax was applicable even if the employees paid for them with their own pre-tax dollars. This was particularly onerous for nonprofits in cities like New York City and Los Angeles, where nonprofits are mandated by local laws to provide these benefits.
What this means to your organization
Because this section of the TCJA has been repealed retroactively, nonprofits that paid tax on transportation fringe benefits on their 2018 and/or 2019 Form 990s will be entitled to a tax refund. (How and when to claim the refund will require further guidance from the IRS.) Nonprofits who begin or continue to provide the benefit in 2020 and beyond will no longer be subject to this tax.
Changes to private foundation tax
Private foundations also received welcome news in the Act. Prior to its passage, private foundations were subject to a 2% excise tax on investment income. Depending on the amount of charitable distributions in any given year, the rate could have been reduced to 1%.
The Act replaced this two-tiered system with a flat 1.39% rate for all private foundations, effective for tax years beginning after December 20, 2019.
This change relieves the burden on foundation staff to constantly monitor and adjust investments and grantmaking to realize the lower tax rate. It could also motivate increased grantmaking because foundations will not need to worry that the extra distributions will push them into a higher tax rate.
For more information on these changes and how they impact your nonprofit organization or private foundation, please contact your Grassi tax advisor.