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A Congressional Christmas Miracle

Just in time for the holidays, Congress gave two gifts to tax-exempt organizations as part of the new government funding bill signed into law on December 20, 2019.

First, the excise tax imposed on the investment income (generally, interest, dividends, rents, royalties, and capital gain net income) of private foundations under Section 4940 of the Internal Revenue Code has been set at a flat 1.39%.  This change simplifies prior law, which imposed a default 2% rate, reduced to 1% depending on the private foundation’s qualifying distributions (which required application of a rolling average formula).  The new rate goes into effect for taxable years beginning after December 20, 2019.

Second, Congress has repealed the “parking tax” that was imposed on tax-exempt organizations in the Tax Cuts and Jobs Act of 2017 (the “2017 Act”).  Under the 2017 Act, a new section was added to the tax code which would prohibit for-profit employers from deducting expenses paid or incurred to provide qualified transportation fringe benefits (including but not limited to employee parking or transit passes).  Congress attempted to impose a parallel limitation on tax-exempt organizations by requiring them to increase the amount of their unrelated business taxable income by the amount of qualified transportation fringe benefit expenses that would be nondeductible if they were subject to the same rules as taxable entities.  In other words, tax-exempts were required to pay a tax of up to 21% on the amount of any qualified transportation fringe benefit expenses.  The passage of this provision led to much confusion in the nonprofit world.  After all, while nonprofits have long been taxed on unrelated business income, the provision effectively imposed a tax on expenses rather than income.

Thankfully, tax-exempt organizations will no longer be driven to distraction for providing parking to their employees—the repeal is retroactive to the passage of the 2017 Act.